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Fed Keeps Rates Steady, Ups Inflation Target: How are Banks Affected?
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For the second time in a row, the Federal Reserve kept the interest rates unchanged. The Fed funds rates remain at 4.25-4.5%.
Meanwhile, the central bank affirmed two rate cuts this year. The “dot plot,” which maps out policymakers' expectations for where interest rates could be headed in the future, indicated two interest rate cuts for 2025.
Fed’s Dot Plot
Image Source: The Federal Reserve
Conversely, the Fed did make changes to its inflation and growth projection targets, which are likely to be impacted by Trump’s tariff plans. Despite this, the markets reacted positively to the central bank’s announcements and all three major indices ended the day in green. The rate-sensitive sectors, including Financial Services, were among the top performers in the S&P 500 Index.
Banks — the major constituents of the Financial Services sector — witnessed a notable rise yesterday. The KBW Nasdaq Regional Banking Index and the S&P Banks Select Industry Index inched up 1% and 1.1%, respectively. Shares of Wall Street biggies, including JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) and Citigroup (C - Free Report) , rose more than 1.5%. Even regional bank stocks like Comerica (CMA - Free Report) and KeyCorp (KEY - Free Report) rallied 1.3% yesterday.
Before we discuss the implications of the Fed’s announcements on banking stocks, let us check out these in detail.
Unlike the past couple of FOMC meetings, the Fed sees that Trump’s tariff plans are likely to drive up prices and hurt economic growth.
In the opening statement at the press conference, Fed Chairman Jerome Powell said, “Some near-term measures of inflation expectations have recently moved up. We see this in both market- and survey-based measures, and survey respondents, both consumers and businesses, are mentioning tariffs as a driving factor.”
Powell added, “Looking ahead, the new Administration is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy. While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects on the economic outlook is high.”
Per the latest Summary of Economic Projections (“SEP”) for 2025, inflation will likely be 2.8%, an upward tick from the prior forecast of 2.5%. Powell noted that the upward inflation adjustments are "really due to the tariffs coming in."
Per the latest SEP data, the U.S. economy is anticipated to grow 1.7% this year and 1.8% in 2026. This shows a downward change from the prior economic growth targets of 2.1% and 2% for 2025 and 2026, respectively.
How Will Banks Be Affected by the Fed Announcement?
With no change in interest rates for now, banks will likely face extended periods of elevated funding costs. As the Fed started raising interest rates in March 2022, banks such as JPM, BAC, C, CMA and KEY recorded significant jumps in net interest incomes (NII) and net interest margins (NIM). However, higher rates led to a substantial increase in funding and deposit costs, hurting banks’ NII and NIM growth in 2024.
As economic growth is likely to be subdued, the lending scenario is not expected to improve much in 2025 from 2024. With interest rates remaining high for long, the operating backdrop for banks will likely be challenging. Weak asset quality will continue to be a major headwind this year, as borrowers may find it difficult to repay loans.
Given the substantial ambiguity in the markets, deal-making activities seem to have taken a back seat. Earlier, banks were expected to record bumper revenues from the investment banking business, but now that seems far-fetched.
Therefore, the operating environment for banks is less likely to improve anytime soon. A turnaround in banks’ financial performance will take time and is not expected before mid-2025.
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Fed Keeps Rates Steady, Ups Inflation Target: How are Banks Affected?
For the second time in a row, the Federal Reserve kept the interest rates unchanged. The Fed funds rates remain at 4.25-4.5%.
Meanwhile, the central bank affirmed two rate cuts this year. The “dot plot,” which maps out policymakers' expectations for where interest rates could be headed in the future, indicated two interest rate cuts for 2025.
Fed’s Dot Plot
Image Source: The Federal Reserve
Conversely, the Fed did make changes to its inflation and growth projection targets, which are likely to be impacted by Trump’s tariff plans. Despite this, the markets reacted positively to the central bank’s announcements and all three major indices ended the day in green. The rate-sensitive sectors, including Financial Services, were among the top performers in the S&P 500 Index.
Banks — the major constituents of the Financial Services sector — witnessed a notable rise yesterday. The KBW Nasdaq Regional Banking Index and the S&P Banks Select Industry Index inched up 1% and 1.1%, respectively. Shares of Wall Street biggies, including JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) and Citigroup (C - Free Report) , rose more than 1.5%. Even regional bank stocks like Comerica (CMA - Free Report) and KeyCorp (KEY - Free Report) rallied 1.3% yesterday.
Before we discuss the implications of the Fed’s announcements on banking stocks, let us check out these in detail.
Fed Raises Inflation Target, Lowers Growth Forecast
Unlike the past couple of FOMC meetings, the Fed sees that Trump’s tariff plans are likely to drive up prices and hurt economic growth.
In the opening statement at the press conference, Fed Chairman Jerome Powell said, “Some near-term measures of inflation expectations have recently moved up. We see this in both market- and survey-based measures, and survey respondents, both consumers and businesses, are mentioning tariffs as a driving factor.”
Powell added, “Looking ahead, the new Administration is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy. While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects on the economic outlook is high.”
Per the latest Summary of Economic Projections (“SEP”) for 2025, inflation will likely be 2.8%, an upward tick from the prior forecast of 2.5%. Powell noted that the upward inflation adjustments are "really due to the tariffs coming in."
Per the latest SEP data, the U.S. economy is anticipated to grow 1.7% this year and 1.8% in 2026. This shows a downward change from the prior economic growth targets of 2.1% and 2% for 2025 and 2026, respectively.
How Will Banks Be Affected by the Fed Announcement?
With no change in interest rates for now, banks will likely face extended periods of elevated funding costs. As the Fed started raising interest rates in March 2022, banks such as JPM, BAC, C, CMA and KEY recorded significant jumps in net interest incomes (NII) and net interest margins (NIM). However, higher rates led to a substantial increase in funding and deposit costs, hurting banks’ NII and NIM growth in 2024.
As economic growth is likely to be subdued, the lending scenario is not expected to improve much in 2025 from 2024. With interest rates remaining high for long, the operating backdrop for banks will likely be challenging. Weak asset quality will continue to be a major headwind this year, as borrowers may find it difficult to repay loans.
Given the substantial ambiguity in the markets, deal-making activities seem to have taken a back seat. Earlier, banks were expected to record bumper revenues from the investment banking business, but now that seems far-fetched.
Therefore, the operating environment for banks is less likely to improve anytime soon. A turnaround in banks’ financial performance will take time and is not expected before mid-2025.