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Hawkish Fed Pauses Rate Hikes: What This Means for Banks
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The cooling inflation numbers reinforced the market participants' expectations that the Federal Reserve will hit a pause on interest rate hikes. And as expected, the rates remain unchanged at 5-5.25% after 10 consecutive raises beginning January 2022.
After peaking at 9.1% in June 2022, the Consumer Price Index (CPI) for May was just 4%. This is the smallest monthly growth in the CPI since March 2021. Nonetheless, the number is still way above the Fed’s target of 2%. Also, the job markets continue to be tighter.
Hence, the Fed officials have left the door open for more hikes later in the year. They now see the Fed fund rates peaking at 5.6% this year, up from the previous March projection of 5.1%. Investors didn’t seem to be happy with this. The KBW Nasdaq Regional Banking Index declined 2.7% yesterday. Likewise, shares of most banks, including PacWest Bancorp , Comerica (CMA - Free Report) and KeyCorp (KEY - Free Report) , ended the day in the red.
In the statement issued following the end of the two-day FOMC meeting, the officials noted, “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
While the Fed officials don’t expect any interest rate cuts this year, they project rates to come down to 4.6% in 2024.
Further, in its latest Summary of Economic Projections, the central bank sees marginally stronger economic growth in 2023. The U.S. economy is anticipated to grow 1% this year, up from March's 0.4% projection. But the labor market will likely continue to be more resilient than expected. The officials now expect the unemployment rate to rise to 4.1% this year, well below the prior 4.5% forecast.
Impact of the Fed Policy on Banks
“The U.S. banking system is sound and resilient.” The Fed statement said this.
But over the past few months, we have seen what these unprecedented faster rate hikes (not seen since the 1980s) could do to the regional banking industry. Huge exposure to uninsured deposits and asset-liability mismatches caused much damage to the industry. This led to the regional banking crisis, which resulted in heavy deposit outflows and the failure of three major regional banks.
Several regional banks, including PacWest Bancorp, Zions (ZION - Free Report) , Comerica, Fifth Third Bancorp (FITB - Free Report) and KeyCorp, witnessed pessimistic investor sentiments. Though the crisis has since been contained, the faster rate hike continues to take a toll on banks’ top-line performance because of rising funding costs and waning loan demand.
Recently, several banks came out with a bleak second-quarter 2023 outlook. KeyCorp CEO Chris Gorman noted that net interest income (NII) will come much lower than previously expected. NII is now anticipated to slide 12% sequentially, which is substantially below the 4-5% fall guided during the first-quarter earnings conference call.
Likewise, Zions expects its net interest margin to shrink to almost 2.85% from 3.33% in the first quarter of 2023. Further, Comerica anticipates NII to be at the low end of the previously-mentioned range of a sequential decline of 11-13%.
Fifth Third also lowered its second-quarter revenue guidance. The lender now expects the metric to be down in the range of 2-3% sequentially compared with its previous forecast of stable revenues.
Though the operating backdrop is not expected to change much in the near term, a pause in the rate hike will likely provide a much-needed breather for banks.
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Hawkish Fed Pauses Rate Hikes: What This Means for Banks
The cooling inflation numbers reinforced the market participants' expectations that the Federal Reserve will hit a pause on interest rate hikes. And as expected, the rates remain unchanged at 5-5.25% after 10 consecutive raises beginning January 2022.
After peaking at 9.1% in June 2022, the Consumer Price Index (CPI) for May was just 4%. This is the smallest monthly growth in the CPI since March 2021. Nonetheless, the number is still way above the Fed’s target of 2%. Also, the job markets continue to be tighter.
Hence, the Fed officials have left the door open for more hikes later in the year. They now see the Fed fund rates peaking at 5.6% this year, up from the previous March projection of 5.1%. Investors didn’t seem to be happy with this. The KBW Nasdaq Regional Banking Index declined 2.7% yesterday. Likewise, shares of most banks, including PacWest Bancorp , Comerica (CMA - Free Report) and KeyCorp (KEY - Free Report) , ended the day in the red.
In the statement issued following the end of the two-day FOMC meeting, the officials noted, “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
While the Fed officials don’t expect any interest rate cuts this year, they project rates to come down to 4.6% in 2024.
Further, in its latest Summary of Economic Projections, the central bank sees marginally stronger economic growth in 2023. The U.S. economy is anticipated to grow 1% this year, up from March's 0.4% projection. But the labor market will likely continue to be more resilient than expected. The officials now expect the unemployment rate to rise to 4.1% this year, well below the prior 4.5% forecast.
Impact of the Fed Policy on Banks
“The U.S. banking system is sound and resilient.” The Fed statement said this.
But over the past few months, we have seen what these unprecedented faster rate hikes (not seen since the 1980s) could do to the regional banking industry. Huge exposure to uninsured deposits and asset-liability mismatches caused much damage to the industry. This led to the regional banking crisis, which resulted in heavy deposit outflows and the failure of three major regional banks.
Several regional banks, including PacWest Bancorp, Zions (ZION - Free Report) , Comerica, Fifth Third Bancorp (FITB - Free Report) and KeyCorp, witnessed pessimistic investor sentiments. Though the crisis has since been contained, the faster rate hike continues to take a toll on banks’ top-line performance because of rising funding costs and waning loan demand.
Recently, several banks came out with a bleak second-quarter 2023 outlook. KeyCorp CEO Chris Gorman noted that net interest income (NII) will come much lower than previously expected. NII is now anticipated to slide 12% sequentially, which is substantially below the 4-5% fall guided during the first-quarter earnings conference call.
Likewise, Zions expects its net interest margin to shrink to almost 2.85% from 3.33% in the first quarter of 2023. Further, Comerica anticipates NII to be at the low end of the previously-mentioned range of a sequential decline of 11-13%.
Fifth Third also lowered its second-quarter revenue guidance. The lender now expects the metric to be down in the range of 2-3% sequentially compared with its previous forecast of stable revenues.
Though the operating backdrop is not expected to change much in the near term, a pause in the rate hike will likely provide a much-needed breather for banks.