Answer:

Yes, higher interest rates do increase interest income and benefit savers, and vice versa, and conversely have a negative effect on borrowers on the interest expense side.

The part, though, that I would differ from the vantage point of the article you sent is that higher interest rates have derivative effects within the economy that far outweigh any benefit on added interest income. What new small businesses didn’t start, what leveraged buyouts did not take place, and what other investment-related activities failed to happen during the time when rates were higher, and these transactions failed to “pencil”? The longer-term effects of that I believe are more damaging than the short-term benefits to a smaller investor base with a higher interest income.

The point on the total debt outstanding being now at 35T versus a lower number in past rate tightening cycles that is causing such an increase in the interest income to savers and purportedly helping the economy is intuitive. However, remember who the largest holder of that debt is receiving those higher interest payments – The US Government. The Fed’s balance sheet of $7.5T (down from over $9T in QT) matters, too, as the interest paid is not spent on the economy. Also, the wealthier person who has enough savings to notice an increase in interest income from savings rates being higher has a lower propensity to spend more than someone less wealthy must spend less.

All this to say, I would take the other side to the author you were kind enough to share with me. Thanks for your question.

Brian T. Szytel – April 18, 2024