Five Questions With: Michael D. Ice

MICHAEL D. ICE is a professor of finance at the University of Rhode Island. / COURTESY GIBLIN & CO./JOE GIBLIN
MICHAEL D. ICE is a professor of finance at the University of Rhode Island. / COURTESY GIBLIN & CO./JOE GIBLIN

Michael D. Ice is a professor of finance at the University of Rhode Island. Ice talks with Providence Business News periodically about capital markets and monetary policy, and today discusses federal rate increases and how they might impact the economy.

PBN: What’s your overall take on the median forecast that officials will raise interest rates three times this year?

ICE: Janet Yellen (chair of the U.S. Federal Reserve System) is clearly signaling she’s going to move. Two weeks ago she talked about selling securities back, that’s clearly a signal she’s going to raise rates. The question is whether two or three times would be too much to get in a year. That’s a hard call. You have to see how one and two go, and you have to see what else is going on. If [President Donald] Trump puts out a tax package that’s really favorable, the market is going to love that and take off. I still worry a little bit about whether there’s enough real job creation, or if it’s all the Trump effect, but it seems to feel good enough to get another raise in March. It’s really the second one that’s going to tell you whether she can do three, and it wouldn’t shock me if she got three.

PBN: What does that mean for the financial services industry?

ICE: The traditional commercial bank borrows short and lends long. They take in deposits, which are all short-term, and invest in securities and loans and live on the net interest margin. A positive yield curve is very good for the bank. If they can get the curve with a normalized slope in it, they hit a home run. It hasn’t really happened. That’s one thing that’s good for banks. The second is Trump. If he does deregulate, and knocks off a lot of Dodd Frank, that gives banks the chance to trade again. Before 2007-08, banks were relatively unregulated and got themselves into trouble. Banks got their hands spanked and had to deal with 14,000 pages of Dodd Frank. That could all change, as Trump has signaled. And, if they get a tax credit at the same time, that’s a huge home run for banks. Those two together are the best news a bank could ever hear.

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PBN: How about the overall economy?

ICE: The economy is ready for another rate hike. We’re 10 years into a recovery and that tells you that there’s another recession not too far off from now. Economic cycles last between seven and eight years, and we’re now 10 years into a recovery. I’m just not sure rates are going to be as critical as Trump’s policies. If Yellen goes too far, you’ll see a reaction, but not much.

PBN: What’s your take on inflation?

ICE: I’m not worried about it yet. I think you’ll be able to react when it gets here. Prices aren’t out of control, to my knowledge. That’s the other job of the Fed, is to manage inflation. We haven’t had it for so long. From a textbook point of view, it makes sense. Rates are going to rise, the stock market is buoyant, you’ve got thoughts about a tax cut, so you could get inflation. We just haven’t had it for so long, you almost forget what it feels like. But I don’t feel like consumer spending is quite there, so if you have it, you’ll have it, it’ll be delayed enough to react to.

PBN: Why is monetary policy important to follow for consumers?

ICE: Where do they see interest rates? They see it on the deposits they put in the bank. And for so long they’ve gotten nothing, so they don’t think about it. Those of us who have gray hair can remember 6-8 percent CDs. You have to go back a way, but you could put money in the bank and get paid for it. The second place they see it is in mortgage rates, car rates and credit card rates. Consumers enjoyed getting mortgages at 3-4 percent, and that’s ridiculously abnormal. I think if people haven’t taken out a mortgage, they’re really sleepy. At some point, they’re not going to get 3-4 percent mortgages, it’s going to be 7-8. If rates rise, it’s going to affect the mortgage market, and a home will become more expensive.

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