Rate cuts have a dark side, which is being played out by banks during today’s session on Wall Street. The first rate cut by the Federal Reserve (Fed), scheduled for next week, will reduce interest income for financial institutions. That is to say the principle of monetary flexibility This also marks the beginning of a less profitable stage for these entities. All this, against the backdrop of fears of a recession in the United States, which would force the central bank to hasten the cuts.
JP Morgan is staging this outlook with a downgrade 6.8% in a bag. Its shares fell to $202, a one-month low. While this turn of events is not a surprise, the house’s president and chief operating officer, Daniel Pinto, verbalized it. The manager questioned the bank’s own forecast for interest income (NII, for its acronym in English). He considers that the $85.9 billion expected for this position in 2025 is “unreasonable” and predicts that this figure will be lower, as explained at a financial sector event.
The interest margin is the difference that banks earn between the interest on the loans they make and the interest they pay on savings. During the years of easy monetary policy, the profitability of the financial sector was more limited. That changed with the most aggressive rate hike cycle in the United States in 40 years and was reflected in bank accounts.
This entity is not the only one to suffer in this session. Bank of America (BofA) fell by 2.5%, Citi by 2.7%, Morgan Stanley by 2.5% and Goldman Sachs by almost 5%.
The latter, directed by David Solomon, also warns that curves are coming. In this case, the commercial division of trade due to the loss of attractiveness of fixed income securities. Profits in this area will be reduced by 10%, according to estimates of the CEO, who participated in the same event, reports Bloomberg.
The Fed will announce its next rate decision on Wednesday, September 18. The market is pricing in a standard 25 basis point cut, according to 67% of CME FedWatch Tool positions. The remaining 33% are for a 50 basis point cut. The double or “jumbo” size is only used in emergencies.
In the background, the fear of a recession in the United States does not help either. Wall Street closed its worst week of 2024 on Friday due to this uncertainty. Recently, labor market data reflects the deterioration of employment, with the unemployment rate higher than the Fed’s own forecast. However, it is difficult to judge. whether it is a slowdown or the beginning of a recession. In any case, if suspicions continue to worsen, banks could face more aggressive monetary flexibility than expected, which would directly impact their accounts.
