Interest Rates 101: Understanding the Basics

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In these "interest"ing times that we are living in, interest rates play a major role in our day-to-day lives. In this episode, Drew chats with Jeff Stopko, president & CEO of AmeriServ Financial, Inc., on the topic. Who sets interest rates? What is considered when interest rates are set? What is the difference between an interest rate and an APY? What do interest rates affect? Learn the answers to these questions and more in this information-packed episode!

AmeriServ's Website:
https://www.ameriserv.com/

Credits:
An AmeriServ Financial, Inc. Production 
Music by Rattlesnake, Millo, and Andrey Kalitkin
Hosted by Drew Thomas

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DISCLAIMER
This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts, with the goal of helping to take some of the mystery out of financial and related topics; as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast, and any resources available for download from our website or other resources relating to Bank Chats is not intended, and should not be understood or interpreted to be, financial advice. The host, guests, and production staff of Bank Chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation. AmeriServ Presents: Bank Chats is produced and distributed by AmeriServ Financial, Incorporated.

Transcript

Drew Thomas: 0:03

Fast fact, if you think that interest rates are a new concept, think again. There are records of interest rates dating back over 4000 years to ancient Babylon, when the code of Hammurabi regulated interest rates, and set limits on how much could be charged. I'm Drew Thomas, and you're listening to Bank Chats. All right, so welcome, welcome. Glad to have you with us once again. This is of course, AmeriServ Presents: Bank Chats, where we delve into the intricate world of finance one topic at a time. And that makes us sound way more highbrow than we really are. Today, we're going to be talking about something quite interesting. And that is the topic of interest rates. And so you picture this, you're sitting there, you're sipping your morning coffee, scrolling through your bank app, and you see the interest rate on your savings account. And it seems kind of mundane, right? It's just what it is. And it's kind of this boring, arbitrary number. And you don't realize how much that number has far reaching consequences, not only necessarily for you on your personal accounts, but also farther reaching consequences than that. So, you've got personal impacts, borrowing power, things like lending and savings accounts, national and global impacts, possibly. So, we're going to talk about interest rates, we are going to try to understand all of this and in order to help us do that is our guest on the podcast today. And I don't want to confuse anybody because regular listeners know that our Producer Jeff Matevish, is named Jeff. But our guest is also named Jeff, his name is Jeff Sopko. He's the president and CEO of AmeriServ Financial. Hi, Jeff, how are you?

Jeff Stopko: 1:55

Great. I'm glad to be here. Absolutely. Drew and Jeff. Thank you.

Unknown: 1:59

Yeah, absolutely. I'm really glad to have you, glad that you could make the time to do this, because this is one of those topics that I think affects people on a daily basis, and yet is one of those things that a lot of people don't always understand what is going on. Right? So, you see stuff in the news, you hear about interest rates and inflation and things and that may or may not impact you, right? So, let's start with the basic stuff, right. We're going to talk a little bit about the stuff that impacts you as an individual. So, I think most people who look at the interest rates, you look at things like savings accounts, investments, things like that, how does that kind of interest impact most people?

Jeff Stopko: 2:31

Yeah, maybe let me start by saying, you know, interest rates impact individuals and businesses in different ways. And maybe a good way to help understand that is the high level look at the business of banking. Okay, well, what do banks do? We take in deposits, we take in money from consumers and businesses, and then we turn around and what do we do with that money, we typically then look to lend it out both businesses and consumers. Sure. Well, how interest rates impacted is, we pay to our depositors who bring that money in, we pay them a rate of interest for allowing us to use their money. Fair enough. Fair enough. And there are various types of deposit accounts. There's savings accounts, money market accounts, certificates of deposit, and there are different rates for those products, but it's basically the bank paying the customer or the ability to house their funds. Right. So, that's interest rates, we pay to customers. Okay. So, then there's also interest rates that consumers and businesses pay to the bank. Okay. So, what I mean there is, you will take those deposits will lend them out for mortgage loans, home equity loans, commercial loans, and we will charge the borrower an interest rate for that money. Okay. Okay. So, they're both interest rates, but as I'm trying to explain, there's depending on what side of the equation you're on, sure, you could be receiving an interest payment based on an interest rate from the bank, if you're a depositor, versus paying the bank an interest rate, if you're borrowing money, as yeah, sure, equity loan, mortgage loan, whatever type of loan. So, they're both called interest rates, but you could see, depending on where you're at, what side you're on, you can either be receiving or paying

Unknown: 4:22

Right. So, we, and we've talked to in other interest. episodes of the show where, you know, I think Jeff and I talked about one in a 2 Cents episode, sort of the idea of not putting your, your money in under the mattress at home and all that kind of stuff, like putting your money in a bank is really the safest place for it to be. But as a sort of reward of doing that the bank will usually pay you for the privilege of having it there and then being able to then turn around and lend it out. Now, you said you can turn around and lend out that money, but you can't lend every dollar you have, right. There's a certain amount that you're allowed to lend right?

Jeff Stopko: 4:55

Theoretically, you could lend 100% of our deposits out okay. You know, take, for every $100, we take in we $100 we lend out. It gets more difficult to do that the closer you get to 100%. But we very much want to lend those deposits back into the economy, because that helps a local economy. When people are borrowing money, when businesses are borrowing money, that means they're spending, and spending is an important tool in our economy. So, yeah, it gets, gets more difficult when you get to, we'll call 100% loan-to-deposit ratio. But as a community bank AmeriServ, we typically have been running with a loan-to-deposit ratio of 85% to 90%. So, that means out of every $100 we take in in deposits, we're lending $90 back out, yeah, it's a good ratio. That means we're supporting our economies, we're helping people buy their home, we're helping a business expand, which is important to the economic viability of the area you live in. Yeah, absolutely, we would rather absolutely rather lend more out than not, because if we don't lend it out, we have to turn around and buy investment securities and such, which typically yield a lower interest rate than a loan. So, back to this interest rate discussion, right, because really the profitability of the bank model is the difference we make between what we charge a customer on a loan, versus what we pay on a deposit at spread, is really what banks utilize to open branches, pay our people invest in technology, whatever we need to do.

Unknown: 6:32

Sure, and I think that's a, that's an important distinction that I think a lot of people have, you know, people watch too many movies, I think sometimes and they imagine that the bank is just holding all this money, and there's just, just money everywhere. And there's just, it's not like that. Our goal really, or a bank's goal, I should say, is to do exactly, as you said, to reinvest in our communities, to put that money back out there for people to use in ways that are productive. And then to just take what we need in the middle there to keep things running, and keep the lights on, and keep the people employed, and so forth. So, yeah, that's a good

Jeff Stopko: 7:05

Yeah, I mean, we don't have all this money just point. So. housed in our vault, waiting, yeah. The reality is, you know, the money as you said, you use productively, we want to lend it out, we want to help customers reach their, you know, their financial goals. And that's really so important to a community bank.

Unknown: 7:23

So, when you're looking at a place or at a bank to place your money, and you know, we see interest rates all the time, especially in the last few years, interest rates on savings accounts and CDs have been higher than they had been in the past, probably 10 or 15 years before that. How do you make a comparison? There's an interest rate, right? And then there's also something called an APY? So, what is the difference between an interest rate and an APY and why should I care?

Jeff Stopko: 7:48

Yeah, I mean, it's a subtle difference, usually, it's not dramatic. But basically, it gets into an interest rate and an annual percentage yield, an APY. Okay, so what happens, if you have a deposit account and you're letting the interest that we pay you go into the account and compound, that will cause the APY to be a bit higher? Okay. So, generally, if you're, if you're paying interest on the account only once a year, the APY and the interest rate are going to be basically the same. But if you're compounding it, putting it in, its growing, causes a little higher APY, because in effect, you're earning on the interest that went into your account as well. Okay, so I mean, not, not, not a large difference, but that's the subtle difference between an APY and an interest rate.

Unknown: 8:32

But I think that brings up a good point, let's talk just a minute about the difference between a simple interest and a compound interest. So, when you hear those terms, can you define those maybe in a simple example?

Jeff Stopko: 8:43

Yeah, I guess, so, let's say you have a certificate of deposit, okay. And it has an interest rate of 4%. Okay. But that interest is paid semi-annually, let's say twice a year. So, what that means is, if you had a 10, try to keep the math simple. If you have a$1,000 CD, 4% interest rate, that means over the course of the year, you would earn $40 on that CD, on that CD, right. If the interest is paid semi-annually, what happens is, you would get half of that $40,$20. After six months, you put it into your certificate balance, okay, that has now grown from $1,000 to $1,020. And then you'll catch it, you'll earn your 4% for the next $1020. That's the idea of compounding interest. And it's really helping you make your money work more effectively. In other words, if you don't need to take that money out for whatever reason, spending, buy something. If you could leave it in the account and let it build it will compound and build rapidly over

Unknown: 9:55

Yeah, there's a, there's a very over simplified time. example that I've heard over the years where somebody says, would you rather have a million dollars today, or would you rather somebody give you a penny a day and double it for the next 30 days? And if you do the math, it's crazy. You end up with like something along the lines of$3.7 million, or something by the end of 30 days. But it also talks about the importance of keeping your investments consistent, right? Because really, what's happening is, you know, by the end of day 16, you're still at like, $3. But at day 28, you're at $1 million, by day 29, you're at $2 million, at day thirty, you know. So, it's amazing how, by the end, and I think they use that example sometimes too when they talk about retirement investments and 401k, it's this idea of keeping your money in there and letting it work for you, as you say, and compound and like I said, it's an overly simplistic example. But it is an interesting point.

Jeff Stopko: 10:49

Your point is spot on, because a lot of times people just don't really realize the power of compounding. You know, you sit there and think well, oh, I earned $100 on my CD, you know, it's a $10,000 CD, does it really make a difference? Well, you know what, it does, sure. And if that's, you keep that CD in place for three years, five years, it just continues to build, you earn on a higher balance. And as you said, the value of compounding can be very important to you. You know, as you go through life and try to build your savings or investment account. Yeah.

Unknown: 11:19

So, let's shift gears a little bit. Let's talk about the lending side, of it. So, there's all kinds of different loans out there for anywhere from a personal loan, which is like a personal unsecured loan, all the way up to something most likely the largest loan most people will take out is either a student loan or a house or mortgage. So, how are interest rates calculated on something like a personal loan? Is it the same thing where you just...

Jeff Stopko: 11:41

Yeah, really same concept, it's going to be what you're paying for the use of that money. So, back to again, if you take out $1,000 loan, and it has a 7% interest rate, that means you are going to pay the bank $70 a year for the right you don't have that money and use it. So, it's similar concept. It really isn't compounding going on...

Unknown: 12:04

I was gonna say so that, that doesn't really play into a loan, right? Yeah.

Jeff Stopko: 12:08

And but if you want to, what I'll say, reduce, ultimately, the amount of interest you pay on a loan, if you could pay it off sooner, that would allow you to do that. So, you know, back to my simple example, $1,000 7% that's $70, in interest, first year. As you pay that loan down and make principal payments, that $1,000 goes down to $800 7% of $800 is$56, not 70. So, sure, on the loan side, you can reduce your interest cost if you pay the loan down more rapidly.

Unknown: 12:48

Yeah, I've, I've actually heard, somebody told me one time that if you can afford to, on a mortgage for example, if you can afford to make one principal only payment a year, how much it actually in the long run will reduce the amount of time it takes you to pay off your home, right, because, we'll talk about home interest here in just a little bit as we talk about like the national debt, but the amount of interest on your home, because your home loan is so large normally, you're talking usually several$100,000 possibly, making that one principal only payment really reduces your interest cost. Yeah. So, whether it's a personal loan, or a car loan, or a home loan, essentially interest rate is calculated the same, you get an interest rate that is told to you by your bank, you, and then you can calculate out exactly how much.

Jeff Stopko: 13:31

And obviously the other, as you mentioned, the other item that's important, when on the loan side, is the term of the loan, how long will the loan be outstanding? Okay, okay, a mortgage loan, typical 30 year maturity, you're paying a lot more interest because you have use of the money a lot longer, you take out an auto loan for five years, the interest component isn't as significant as it would be to a residential mortgage where you're paying on it so much longer. So, not only does the interest rate itself impact the payment, but also the length or time you're going to amortize the loan over.

Unknown: 14:09

And that makes sense. And I mean, car prices. I mean,

Jeff Stopko: 14:12

You could almost buy a house for a car price. we can...

Unknown: 14:15

I mean, we can get into that whole conversation sometime. But yeah, the cost of some vehicles now are easily more than the price my parents probably paid for their house, which is crazy. But you're paying that off in a, in a five year timespan usually or something like that, and you maybe maybe six, as opposed to a 30 year or 15 year mortgage, something along those lines. So, that also, you know, plays into I think somewhat on interest rates when it comes to things like revolving lines of credit, or credit cards, right? Normally those interest rates are significantly higher than they would be on a personal loan. Why would that be?

Jeff Stopko: 14:46

Well, the main reason credit card interest rates are so much higher is because that's what's considered an unsecured debt. Okay, there's no collateral associated with it. Whereas if you're buying an automobile, for example, and taking out a loan on that, ultimately the bank is going to have the vehicle as collateral that we could go get if you elect not to pay the loan back. Credit card interest rates are so much higher because there's no collateral involved. Okay, if you have a $5,000 credit card, and you decide you're not going to pay it back, the the bank doesn't have a piece of collateral securing that. So, again, safer loans that have collateral tend to have lower interest rates than unsecured loans. Credit cards are the most expensive interest rate you could have. Yeah, on a loan product.

Unknown: 15:41

Yeah. But that also brings up a good point about the sort of, how we calculate interest rates, how interest rates are decided upon, right. So, when it comes to a basic personal loan, there's more to it, and we'll talk about the Fed and things like that here in a minute. But essentially, what, what the bank is normally doing, is assessing your individual risk and then assigning an interest rate to you, right? So, you're looking at somebody's likelihood to pay it back, the collateral you have, and how much risk is involved for the bank, when you calculate an interest rate is that fair?

Jeff Stopko: 16:11

That's correct. And it's really based upon the

Drew Thomas: 16:12

Yeah, yeah. And you make a very good point, if product, because one of the things really a bank should not do is charge different rates for the same product, to different you're going to a place, any kind of institution, where they individuals. Yeah, that's important. Fair Lending is very are saying to you, well, we're arbitrarily choosing an interest important in our world. So, what you'll see is the bank will establish for automobile loans that have a five-year term, here's an interest rate. You know, residential mortgage loans rate for you. You shouldn't be dealing with that kind of an that have a 15 year term, here's an interest rate. There could be some modification based upon the, I'll say, the financial health or quality of the borrower, but it's usually not, pretty narrow. It's pretty narrow band. institution.

Jeff Stopko: 16:57

Right. But yeah, that should raise some red flags pretty quick. Yeah, absolutely.

Unknown: 17:08

So, let's talk a little bit about how interest rates are decided upon. And to sort of get into that, let's talk about who the Fed is, because we see that on the news, you hear about the Fed making this decision, the Fed making that, who are these people and why? Why are they messing with my interest rate?

Jeff Stopko: 17:23

Absolutely. No, no the Federal Reserve System,

Drew Thomas: 17:24

Yeah, absolutely. When we talk about interest Federal Reserve Bank, I could expand on that, really is the central bank of the United States. Okay. And they serve a critically important role in our economy, okay. And the Federal Reserve System, here's a couple of their, what I'll say their key goals. I mean, this is what they do. Okay, they conduct the nation's monetary policy to promote maximum employment, rates, I don't know that a lot of people always equate an stable prices, that's the inflation element we'll talk about, and moderate long term interest rates for our economy. So, they play a critical role in establishing interest rates. They also help promote the stability of the financial system. So, they oversee the banking system and examine and, and ensure that banks are routinely examined to ensure they're operating properly. I mean, we saw back in 2023, in March you know, there were a couple of larger bank failures, Silicon Valley Bank, Signature Bank, and you know, that's an interest rate with job performance or the job market. example of how the Fed has to ensure oversight of financial institutions. Okay. And, you know, that's part of this whole safety and soundness, ensure the banking system is operating safely and soundly. That's another part in their role. Yeah. So, they have multiple, they have multiple objectives. We're kind of more focusing today on objective one, which is promote maximum employment, stable interest rates, moderate long term interest rates, that's really what our, our focus is today. So, how does that work?

Jeff Stopko: 19:07

You know, let me step back. And before I answer that, so there's this Federal Reserve Bank, so let's look at specifically then the individuals involved. Okay. Okay, that make these decisions. Okay. There's something called the Board of Governors of the Federal Reserve System. There are seven individuals that are in that role. Okay. They're appointed by the President, and they have to be approved by the Senate. Okay, so these seven individuals make up what's called the Board of Governors of the Federal Reserve System. And that group is based in Washington DC, not surprisingly. There are also then across the United States 12 Federal Reserve districts. So, in effect, we have 12 Federal Reserve banks across the country, that this group of seven works with and overseas okay. Like AmeriServ Financial where we're located headquarter in Johnstown. We're in what's called the third Federal Reserve District, which is the Federal Reserve Bank of Philadelphia. Okay. So, those seven individuals, along with five presidents from these districts, okay, meet eight times a year, they're part of what's called the Federal Open Market Committee. And their goal is to establish short-term interest rates. Okay. So, it's really that group of individuals making that decision. And, as you said, when you hear on the news, like, you'll probably hear a headline of the Federal Reserve met and elected to keep rates the same, increase interest rates, they're referring to that meeting of the Federal Open Market Committee, which happens eight times a year.

Unknown: 20:48

So essentially, it's not exclusively a government decision, right? This is really more than one person, first of all, let's put it that way. It's not one person making all these decisions. And then it's not necessarily the government deciding this either, per se. And when you say short-term interest rates, how short-term?

Jeff Stopko: 21:05

I mean, that's really like overnight to three months. Okay, short-term on the money. Yeah. And back to your point, one of the Federal Reserve's job is really to be a-political, you know, they're appointed, they serve longer terms. Each governor has a term up to 14 years. So, the idea there is you, you maintain consistency, and you're not shuffling people in and out of this very important job every year or two, okay. Right, or every four. Yeah, the only, the only Federal Reserve Board of Governors positions that can change every four years, is the Chairman of the committee and the Vice Chair, okay? Those positions aren't locked for 14, but they could change every four. But the idea there is you want to have stability within this very important body so that they, you know, don't become hold on to the, you know, the wills of the party that's in power.

Unknown: 22:00

Sure, yeah, that absolutely makes sense. So, what, what factors do they consider whenever they're setting an interest rate?

Jeff Stopko: 22:08

Sure, they absolutely look at, the key factors they look at is, how is the economy performing, you might hear the term GDP, gross domestic product. If that's growing, or if that's a positive number that signifies the economy's growing. Okay. Another important metric that is very important to the Federal Reserve Board of Governors is the inflation rate. Okay. Because, to have a stable, successful economy over the long haul, you have to ensure inflation is controlled. Economies that have runaway inflation, do not do well. Yeah. Okay. So, really there, that's back to their what I said earlier, their key objectives are to promote maximum employment, but also ensure stable prices. So, it's, it's a balancing act, too.

Unknown: 22:59

So let's, let's elaborate, just a just a touch on inflation. So, essentially, inflation is how much your dollar buys you? Is that, is that a fair assessment? So. So essentially, if a candy bar cost me $1 today, and inflation goes up, than it might cost me $1.10, tomorrow, inflation goes down, and maybe cost me $0.90 the next day. So, how do they calculate inflation? How do they look at that?

Jeff Stopko: 23:20

Basically, what they do when they calculate So, is it but you're right. It's kind of a balancing act, because inflation is, the Fed is targeted a rate of 2%. So, in other words, they are trying to keep the annual rate of inflation to 2% or less, okay? Because there's going to be normal price pressures on products, on wages, people are paid and such. But they have found out longer term, if you could keep that inflation rate around 2%, that's very stable, very predictable. So, that when you're thinking about buying your house, or buying furniture for your house, or going to the grocery store, you want to know that a year from now, I'm not going to be paying 10% more for that product than I am today. Sure. So, you want to have stable inflation, and the Federal Reserve very much focuses on that in terms of where they establish interest rates. Because in periods where the economy is, let's say declining, GDP is declining, and there's evidence the economy is slowing, what the Federal Reserve will typically do is reduce interest rates, okay. They'll reduce those short-term rates and make it more affordable for people to borrow money as we talked about, okay, it's usually when people are borrowing money that's stimulative to the economy. Makes sense? Makes sense. Yeah. If we're in a period where the economy is growing very rapidly, okay. That might be good for employment, it's a balancing act. But if it's causing inflationary pressures for wages you're trying to slow people down in terms of borrowing to go up too quickly, for the price of products at the grocery money. But that also potentially affects how much they can spend at the grocery store, too, right, so. store to increase, what the Federal Reserve will typically You get the point right there. If you're paying more to borrow do is raise interest rates, same concept, to try to make it more expensive to borrow money, slow the economy down. money, right? You have less to buy other things. Right, which should be a slowing factor on the economy. Yeah.

Unknown: 25:36

And I think that, this is an opinion, I guess. But in the United States, we love to spend stuff, like we we're big spenders.

Jeff Stopko: 25:45

Yeah, two thirds of our GDP is driven by spending. Yeah, your observations is 100% accurate.

Unknown: 25:51

Yeah. So, I mean, you figure, you know, convincing people to save, rather than spend is a challenge in our society to a certain degree, which I would assume is a big reason why, you know, I guess that's sort of the other side of the coin though. When those interest rates go up to try to stop people from spending, that interest rate also raises on things like your savings account and your CDs, which encourages people, hopefully to save that money, and earn some money rather than necessarily going out and spending it.

Jeff Stopko: 26:17

Yeah, I mean, you asked a very good question I often get, is it better when rates are higher? Yeah. Because if you're a saver, right, that doesn't really have any loans, you'd rather have a 4% CD, right? Than a 2% CD. Right. Okay. But on the other side, if you're going to borrow money and you're a business, and you want to buy a piece of equipment for your business, you'd rather pay 5% for your loan, than 7%. So, the net of all that is generally what the Federal Reserve has found that the impact that the interest rates have on borrowing money is more significant than the impact it has on the saver.

Unknown: 26:59

Okay, okay. So, let's talk about the big purchase. The purchase that most people, now, we could talk about student loans, because that's a whole other ball of wax. Right? I mean, there's a lot of people that would argue that an 18 year old is essentially buying a house when they're taking out student loans, but, but let's talk about buying a house. Right. So, the housing market has a big impact on the economy. Right. And, you know, during COVID, during the pandemic, I mean, we saw interest rates that we may never see, again, when it comes to housing. Like 2.5-3%, which, which is pretty crazy. On the other hand, back in the early 1980s, we saw some interest rates for housing that were as high as like, 16%. Right. So, how does the Fed and the interest rates, the short-term interest rates you talked about that they set. How does that impact the long-term interest rate of something like a 30 year mortgage?

Jeff Stopko: 27:49

Yeah, usually the, the Fed has more control over short-term interest rates than long-term interest rates, okay. And this gets a little more technical. The market, the people, the people buying Treasury debt that we issue, to fund our country, determine more the cost of 10 year, 15 year, 30 year money, but there's relationships. Typically, what the Federal Reserve does on the short end of the yield curve does have an impact on the longer end. Okay. So, generally, if they're increasing rates on the short end of the curve, which they absolutely control, you're going to see interest rates move up across the curve. That's a general rule. I mean, we're in a little bit unusual situation for the last year or so, but that's I'll say, too, too deep of a topic for our lighter conversation here. Sure. But generally, what the Fed does on the short end of the curve does impact interest rates as you move that.

Unknown: 28:48

So, whenever we talk about something like an interest rate on a house right now, comparatively, the interest rates are really not that high. I mean, people are still buying homes. Right. But the housing market is also kind of weird, because there's not a lot of inventory right now too, nobody wants to sell their house. And part of that could be because of interest rates because they bought their house during, when it's 2% or something.

Jeff Stopko: 29:10

Yeah, let me expand on that. Yeah, because we're in, Yeah, and you can't blame them necessarily. But there's an old in a very unusual situation today. And it goes back to what you just said. In '20 and '21, because of the pandemic, interest rates were at record low levels. Okay. They were at levels not seen in 50 years, okay. So, as a result of that, I mean, the Fed Federal Reserve on the short end of the curve, as we talked about, basically took interest rates down to about 0%. Okay, very low. So, based on, you know you were going out, you were getting mortgages at 3% or 3.5%. And there was tremendous housing activity, tremendous refinancing activity of mortgages, because you had people saying, as you said earlier, for my most important purchase, man, I can lock in a wonderful rate I've ever seen and lower my payments. Right? Right. And there was just record activity. I mean, more mortgages were issued to refinance in '20 and '21, than any other year in Chinese curse, yay you live in interesting times. the history of the country. Wow. So, that is actually creating the dilemma we're in today, okay, because with the inflation inflation kicked in, because of all the fiscal stimulus that occurred, due to pandemic, it caused prices to increase, the Federal Reserve went on a very aggressive tightening campaign to increase interest rates. As a result of that, mortgage rates are now around 7%. Okay, so they're more than double what a lot of people elected to refinance into. So, it's creating this shortage of houses in the market, because people

Drew Thomas: 30:47

This is. And this is, this is one of those things are very hesitant to move and give up their 3%, 3.5% mortgage to now buy a house for a 7% mortgage, I mean, the amount of the increase in the monthly payment is significant. So, it's been a very interesting time, I've never seen in my career where, even though interest rates for mortgages are much higher than they've been, but probably more reasonable by historical standards, right? There still tends to be when a good house comes in a market a lot of demand, they're selling quickly, they're getting full price. It's because there's not enough inventory looming onto the market. That's kind of a complicated. But it relates, goes back to the number of mortgages that were refinanced at these record low rates. People were very hesitant to want to walk away. where, you know,

Unknown: 31:54

I don't know that anybody has ever seen anything quite like this before. There's, there's a lot of historical dependency when we talk about the economy and finances and trying to understand where things might go in the future. And when you run into something like the pandemic that has never historically happened, it makes it very difficult to predict how things are going to play out because you don't have that historical knowledge to base your ideas. Yeah,

Jeff Stopko: 32:18

I mean, the phrase we often use is unintended consequences. Right? And that's kind of an unintended consequence coming out of the pandemic, where rates were so low people walked in such great pricing on their their mortgages. Yeah, they don't want to leave. So, what you see people doing more is home equity lending, right home equity borrowing, they're electing to more money into their house. So, yeah.

Unknown: 32:43

So, essentially, rather than moving to another house, I'll just make my house what I want it to be.

Jeff Stopko: 32:47

Exactly, exactly and Lowe's and Home Depot are

Unknown: 32:50

Yeah, that's, that's yeah, that's yeah, you got to very happy. think about that, too. I mean, I would argue, there's, there's a certain amount of that that happens with vehicles and stuff, too. There was a huge shortage in vehicles, new vehicle availability for a while there. And people were repairing what they had, rather than, you know, buying new.

Jeff Stopko: 33:11

Or and it drove, during that period drove us car prices up to record levels as well, because, again, shortage of cars on the market. So, but that seems to have leveled off now, but.

Unknown: 33:22

I just think that it's really fascinating when you start thinking about the fact that something as simple as an interest rate is really, at the core responsible for all of his spider webbing that goes out throughout the economy. You don't always think about that. Yeah, no. And I think that's a big...

Jeff Stopko: 33:39

I agree, and I think this is a very good discussion we're having because it goes back to those 12 people that meet eight times a year in Washington, have a big impact on interest rates, and that just spiderwebs through the economy as your phrase, so absolutely. And it impacts everything, everyday, everyday people in all kinds of ways.

Unknown: 33:59

Yeah, and when you start thinking about interest rates, you start thinking about, as you pointed out earlier, both the term of the loan and then the size of the loan, if my credit card went from, say 5% to 7%, which is crazy, no credit card would ever be that low, but I'm just saying it would be a non-event, right? Because my balance is hopefully not in the five or six digits, right. But at the same time, you know, a housing when you're talking about buying something that's a home that's $250000, $350000,$450000, maybe even more, that 2% interest differences is huge.

Jeff Stopko: 34:35

Back early, where we started the conversation, 2% or 3% higher interest rate over a 20-30 year term. Yeah, that's a big deal. You're paying a lot more interest. Yeah, you really are.

Unknown: 34:49

So, let's just briefly, I just want to talk too about the fact that it's not only just the domestic impacts that interest rates have, but they're also impacts on interest rates that happen throughout the world. Correct. So, you know, again, we could get into probably several episodes worth of discussion about world events and how it impacts things. But at the end of the day, those 12 people in Washington are also looking at not just what's happening in our country, but what's happening in our neighboring countries, what's happening across the world. And that impacts, to some degree, their decision making as well. Correct? Correct. Yeah.

Jeff Stopko: 35:21

I mean, it's really United States as the strongest economy in the world. We do. Okay. China has a very large economy. But at the end of the day, it's a global economy, because so much, so many of our businesses here, deal with international partners or sell product internationally and such. So, yeah, so the Federal Reserve Board of Governors, obviously, watches carefully what's happening in the world. And what you're trying to avoid, as is volatility. And, and again, kind of the times we're in when you see instances of war, war in Ukraine, war in Israel, creates more volatility in the system. They're ultimately first focused on the US in our situation, but because of this global economy, they have to be cognizant of what's happening.

Unknown: 36:10

Yeah. Yeah. And I think, you know, again, without

Jeff Stopko: 36:11

And really where it became more visible was during getting into a lot of details, you start thinking about the fact that it becomes sort of a yin and yang, where, say a the pandemic, because where there were companies relying on company is dependent on making widgets, right, and the material to make that widget is in a certain country, right? And that country is unstable. Well, now the raw materials you're buying from that country to make your widgets is more expensive, which means your widgets more expensive, which, it's the snowballing effect. Exactly. So, when you know, people say like, well, why in the world does something happening halfway across the planet impact my savings interest rate? On my little savings account. Right? That's, it is a snow, it is a sort of thing that rolls downhill. products from other countries, and it became more difficult to get those products in, or they couldn't get as much of that product. You saw what? The same demand for fewer products, right goes up goes up. Right? And that really was prevalent during the pandemic, and it really exposed some weakness in our supply chains as a country.

Unknown: 37:19

Oh, yeah. Anybody that couldn't buy toilet paper or, or cleaning products. It was crazy. There was a time when you literally couldn't walk into any store and buy soap. Yeah, right. So, it's crazy.

Jeff Stopko: 37:31

So, like things like chips for comp[uters], you know, computers and technology. I mean, that's why I think you've seen more of an effort to bring some of that important production into the United States, because I think one of the lessons coming out of the pandemic is, you know, some of these parts are so important to the production of a car or whatever. Yeah, you want more control of your supply chain, and you have better control if it's in the United States versus it's in China or Taiwan.

Unknown: 37:58

Yeah, yeah, I mean, even even just crazy things like you know when the Suez Canal was being blocked, you know, by that ship that broke down, it wasn't even that, wasn't even necessarily a malicious event. It was just an event that stopped everything from passing through a very important port, or channels to be able to get products to the rest of the world. It was crazy. So, well, you know what I mean, this has been a fascinating discussion. And I'm sure we could go into even more depth. But I just want to thank you very much for coming and talking to us about this. I think that trying to understand how something as simple as an interest rate can affect so many aspects of your life is just really important to understand when you're dealing with your finances, you know, when you're trying to decide where your money should be and what you should buy and what may, maybe you shouldn't buy at that particular time, things like that. Just understanding how that number matters to you is important.

Jeff Stopko: 38:48

I appreciate you inviting me in for the podcast. Yeah, absolutely. You're welcome back anytime glad to come back and no, and it's a complex topic, it is. And yeah, I think we tried to keep it at a level that is more understandable for, for individuals but, you did a great job. You did a great job moderating the podcast, but it's, it there's the, I like your spider web example. This impacts so many, interest rates and inflation and monetary policy just impacts so much of our daily lives that I think a lot of people just don't realize that, so hopefully we provided some background and context that could be helpful. Absolutely.

Drew Thomas: 39:33

And, and like, like we always say, you know, please, you know, check with your financial advisor, with a banker that you trust, somebody that understands this stuff. If you have questions, you can always message the show, we can we can try to give you some pointers, but at the end of the day, you should talk to somebody that you know that understands your finances and make your decisions based on that. If you haven't had a chance to subscribe to the podcast, please do that. It really definitely helps us out. Plus, you'll be notified every single time that a new episode drops, and which is every other Tuesday, essentially. And yeah, so thanks. Thank you very much once again, Jeff, appreciate it.

Jeff Stopko: 40:06

Thank you, glad to be here.

Drew Thomas: 40:15

This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts with the goal of helping to take some of the mystery out of financial and related topics, as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast and any resources available for download from our website or other resources relating to Bank Chats, is not intended, and should not be understood, or interpreted to be, financial advice. The host, guests, and production staff of Bank Chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for financial professional who is aware of the facts and circumstances of your individual situation. Understanding interest rates and how they affect your financial health can be complex. But ultimately, knowing the basics is enough for most of us. A higher interest rate could put more money in your pocket if you're saving or investing, while increasing the cost of borrowing money as well. Ultimately, having a trusted financial advisor to help you through the ups and downs is always a good idea. We are very grateful to Jeff Stopko, president and CEO of AmeriServ, for joining us on the show, and we hope to have him back again in the future. I also want to thank Jeff Matevish for his production and transcription skills, and to thank you, our listener, for subscribing to the podcast. If you're new to the show, I invite you to consider subscribing as well. AmeriServ Presents Bank Chats is produced and distributed by AmeriServ Financial Incorporated. Music by Rattlesnake, Millo, and Andrey Kalitkin. You will find all of our episodes on our website ameriserv.com/bankchats, or by searching for the show on your favorite podcast service. For now, I'm Drew Thomas. So long.