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Fewer Fed Rate Cuts Likely in 2025: What This Means for Banks
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The Federal Reserve has started cutting interest rates since September 2024 and has cut interest rates by 75 basis points so far this year. The final rate cut of 25 basis points for 2024 is expected at today’s FOMC meeting.
During the first rate cut meeting in September 2024, the Fed signalled four potential rate cuts in 2025. However, recent hotter-than-expected inflation suggests prices are becoming sticky, making it harder for inflation to decrease. This has led to assumption that the Fed may scale back its rate cut plans for 2025.
Now market participants are expecting two to three cuts instead of four in 2025. In the quarterly projections in September, Fed officials anticipated cutting the benchmark rate by another full percentage point to put it at around 3.4% by the end of 2025. But now only half a percentage point rate cut is expected in 2025.
With fewer rate cuts expected, shares of banking stocks like Comerica Incorporated (CMA - Free Report) , Citigroup Inc. (C - Free Report) , Bank of America Corporation (BAC - Free Report) and Wells Fargo & Company (WFC - Free Report) have gone down. Banks have been reeling under increasing funding cost pressure over the past few years. Though higher rates led to a significant jump in banks’ net interest income (NII), the same resulted in increased funding costs, which squeezed the net interest margin (NIM).
As the Fed lowers interest rates, funding costs will gradually stabilize and then decline. Hence, this will alleviate pressure on NIM to some extent. Earlier, with four rate cuts in 2025, stocks like CMA, C, BAC and WFC were more optimistic about NII and NIM growth in 2025. However, with fewer rate cuts, the growth might take time to reflect in their financials.
Though it is believed that the Fed will remain keen on projecting additional easing for 2025, guidance regarding the pace of rate cuts will likely be more cautious going forward.
Reasons for Considering Fewer Rate Cuts in 2025
High Inflation Rate: Inflation remains a key concern. The Consumer Price Index rose 2.7% year over year in November. It also marginally moved up from October’s 2.6%. Core inflation, which excludes food and energy, climbed 3.3% for the fourth consecutive month. Wholesale prices also increased more than expected, indicating ongoing inflationary pressures. As inflation rate is still high, the central bank is likely to keep interest rates higher to help cool down demand and reduce price pressures. Despite some signs of moderation, inflation has not yet reached the target levels that would typically prompt rate cuts.
Resilient Labor Market: The U.S. job market has remained resilient and has not shown any sign of significant weakness. Wilmington Trust’s chief economist Luke Tilley notes that the average growth for private sector jobs was 108,000 over the past six months. However, Tilley also mentioned that the demand for labor is slowing down now and expects the job growth to decline to nearly 100,000 in 2025. With job growth still robust, the Fed is less likely to make aggressive cuts to interest rates, as doing so could further fuel inflation.
Economic and Political Uncertainty: In addition to inflation and a strong labor market, the Trump administration’s fiscal policies are also expected to pose new challenges for the Fed’s policymakers. The uncertainty around these policies and their potential impact on inflation and growth may further influence the central bank’s decision-making process in 2025.
Potential Impacts of Fewer Rate Cuts on Banks
Apart from the above-mentioned decrease in funding costs, lower rates mean a rise in loan demand. The lending scenario has been muted as the central bank began tightening its monetary policy in March 2022. This had been hurting banks’ financials immensely.
As the rates come down, loan demand is gradually expected to improve. However, fewer rate cuts than anticipated might affect consumer sentiments, impacting loan demand to some extent.
If the Fed continues with fewer rate cuts in 2025, the anticipated growth in banks' NII and NIM will likely be slower than expected.
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Fewer Fed Rate Cuts Likely in 2025: What This Means for Banks
The Federal Reserve has started cutting interest rates since September 2024 and has cut interest rates by 75 basis points so far this year. The final rate cut of 25 basis points for 2024 is expected at today’s FOMC meeting.
During the first rate cut meeting in September 2024, the Fed signalled four potential rate cuts in 2025. However, recent hotter-than-expected inflation suggests prices are becoming sticky, making it harder for inflation to decrease. This has led to assumption that the Fed may scale back its rate cut plans for 2025.
Now market participants are expecting two to three cuts instead of four in 2025. In the quarterly projections in September, Fed officials anticipated cutting the benchmark rate by another full percentage point to put it at around 3.4% by the end of 2025. But now only half a percentage point rate cut is expected in 2025.
With fewer rate cuts expected, shares of banking stocks like Comerica Incorporated (CMA - Free Report) , Citigroup Inc. (C - Free Report) , Bank of America Corporation (BAC - Free Report) and Wells Fargo & Company (WFC - Free Report) have gone down. Banks have been reeling under increasing funding cost pressure over the past few years. Though higher rates led to a significant jump in banks’ net interest income (NII), the same resulted in increased funding costs, which squeezed the net interest margin (NIM).
As the Fed lowers interest rates, funding costs will gradually stabilize and then decline. Hence, this will alleviate pressure on NIM to some extent. Earlier, with four rate cuts in 2025, stocks like CMA, C, BAC and WFC were more optimistic about NII and NIM growth in 2025. However, with fewer rate cuts, the growth might take time to reflect in their financials.
Though it is believed that the Fed will remain keen on projecting additional easing for 2025, guidance regarding the pace of rate cuts will likely be more cautious going forward.
Reasons for Considering Fewer Rate Cuts in 2025
High Inflation Rate: Inflation remains a key concern. The Consumer Price Index rose 2.7% year over year in November. It also marginally moved up from October’s 2.6%. Core inflation, which excludes food and energy, climbed 3.3% for the fourth consecutive month. Wholesale prices also increased more than expected, indicating ongoing inflationary pressures. As inflation rate is still high, the central bank is likely to keep interest rates higher to help cool down demand and reduce price pressures. Despite some signs of moderation, inflation has not yet reached the target levels that would typically prompt rate cuts.
Resilient Labor Market: The U.S. job market has remained resilient and has not shown any sign of significant weakness. Wilmington Trust’s chief economist Luke Tilley notes that the average growth for private sector jobs was 108,000 over the past six months. However, Tilley also mentioned that the demand for labor is slowing down now and expects the job growth to decline to nearly 100,000 in 2025. With job growth still robust, the Fed is less likely to make aggressive cuts to interest rates, as doing so could further fuel inflation.
Economic and Political Uncertainty: In addition to inflation and a strong labor market, the Trump administration’s fiscal policies are also expected to pose new challenges for the Fed’s policymakers. The uncertainty around these policies and their potential impact on inflation and growth may further influence the central bank’s decision-making process in 2025.
Potential Impacts of Fewer Rate Cuts on Banks
Apart from the above-mentioned decrease in funding costs, lower rates mean a rise in loan demand. The lending scenario has been muted as the central bank began tightening its monetary policy in March 2022. This had been hurting banks’ financials immensely.
As the rates come down, loan demand is gradually expected to improve. However, fewer rate cuts than anticipated might affect consumer sentiments, impacting loan demand to some extent.
If the Fed continues with fewer rate cuts in 2025, the anticipated growth in banks' NII and NIM will likely be slower than expected.