The role of liquidity and credit in modern banking markets

Predicting the Future Interest Rate

It is likely not possible to forecast the interest rate accurately, as the Federal Reserve has been keeping it new zero for several years now and more recently has been promising rate hikes yet holding press conferences in which the tone is far more dovish than hawkish. Thus, from expectations of four rate hikes a year totaling a 100 basis point rise, expectations are reduced to one, perhaps two, rate hikes, as the "data-dependent" Fed sees bad jobs reports, a stagnating global economy, and other factors putting pressure on the decision to normalize rates (Durden, 2016).

Once rates do hike, however, there is likely to be a sharp correction in the stock market as investors seek less risky investments (even a mere 25 basis point raise is enough to cause investors to flee the market for safer havens, as the previous rate hike showed) (Phoenix Capital, 2016). The rebounding of the market (considering volume) has the appearance more of a short squeeze than the return of confidence, and with the Fed bouncing between hawkishness and dovishness, one cannot know which way rates will go in the foreseeable future. They could even possibly go negative as they have in Europe and Japan (Durden, 2015).

Q2: Subject: Factors Affecting Deposits

The main factors affecting deposits are interest rates (too late interest rates compels investors to seek riskier asset classes, such as buying stocks at all-time high prices) or safer asset classes like gold; thus, bank deposits dry up. Or another factor can be the state of the economy, which takes money out of the hands of the middle class individual with a bank account; his income dwindles as a result of recession-like symptoms on a global scale; he does not have as much to save, and deposits dry up.

Q4: Subject: Credit in the Banking Industry

Credit is so important, especially in the modern economy, because the global market does not work without it. Credit bubbles are essentially at the core of every boom/bust cycle in the modern era, when an infusion of credit by central banks floods cash into the hands of businesses and buyers for a short while, only then to turn off the credit tap and tighten up lending policy (the run-up to the 2008 housing bust and the strict lending policies that were enacted after years of easy credit is a perfect example).

Credit impacts the economy in diverse ways. It can allow the business economy to operate and the consumer economy to spend; however, if risky borrowers dominate the credit market, loans become toxic, and those buying debt are typically left holding the bag when the loans blow up (that is unless the government decides that taxpayers should be put on the hook for the risky loans made by banks, as was the case in the wake of the 2008 disintegration).

The role of the banking industry in this respect is to provide credit to credit-worthy individuals -- however, the need to make profits can supersede sensible lending (as loans are monetized and sold to investors).