A recent report revealed, that it is supposed to perform Interest rates increase by the Federal Reserve To increase the profits of lending to major financial companies.
For now, the big banks will have the opportunity to prove to investors that they can thrive if interest rates continue to rise.
JPMorgan, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley are scheduled to announce first-quarter results this week.
Investors hope financial stocks will benefit from higher interest rates, but it’s a complicated math.
If the Fed is serious regarding tightening monetary policy aggressively, it might backfire on the big banks.
The Fed is no longer expected to gradually raise interest rates.
The consensus view among economists is that a series of increases of regarding a quarter of a point will not stop during the coming period.
After cutting rates to zero at the start of the pandemic in March 2020, the Fed kept rates there until eventually raising them to a range of 0.25% to 0.5% in March.
But, according to CME futures trading, investors are now pricing in roughly 80% of the chance of a half-point increase at the Federal Reserve’s meeting in May and regarding 55 percent of a further half-point increase in June.
There is even a more than 30% chance of raising the interest rate by three-quarters of one point, to a range of 1.5% to 1.75%.
Large increases in interest rates can erode corporate profits and lead to more volatility in the stock market.
Bank profits might also be hit, as the slide on Wall Street might lead to lower demand for mergers and sales of new shares.
The Wall Street giants get lucrative advisory fees from deals, initial public offerings and Special Purpose Acquisition Corporation (SPAC) listings.
Meanwhile, an economic slowdown caused by significantly higher rates might hurt demand for mortgages and other consumer loans.
Mortgage rates are now close to 5% and might continue to rise along with longer-term Treasuries.
The 10-year Treasury yield has risen to around 2.7% this week, the highest since March 2019.
So any increase in lending profit margins can be offset by a decrease in loan activity.
People will be less likely to buy new homes in a real estate market that has already become too expensive for many Americans.
An inverted yield curve can also hurt banks.
With short-term bond rates – and in particular the two-year Treasury – rising briefly above 10-year Treasury rates, this might also put a cap on profits for banks that need to pay higher short-term rates on deposits.
