What this means for banks

Despite persistent inflation, the Federal Reserve announced a further 25 basis point interest rate cut yesterday. This lowered the Fed’s key interest rates to 4.25-4.5%, which is now the same level as December 2022.

In addition, the central bank reduced the number of cuts planned for 2025, signaling caution. The dot plot, which represents policymakers’ expectations for the future direction of interest rates, showed only two rate cuts in 2025. This is lower than the four estimated during the September FOMC meeting and would put interest rates close to 3.9% by the end of 2025.

Fed dot plot

Image source: Federal Reserve

Fed Chairman Jerome Powell said: “The slower pace of rate cuts next year reflects both the higher inflation readings we have had this year and expected inflation.” The stock market then plunged and all major indexes ended the day in the red . Interest rate-sensitive sectors, including financial services, were among the worst performers in the S&P 500 Index.

Banks, the main components of the financial services sector, recorded significant declines yesterday. The KBW Nasdaq Regional Banking Index and the S&P Banks Select Industry Index fell more than 5%. Stocks from Wall Street greats, including JPMorgan JPM, Bank of America BAC and Citigroup C, more than 4% fueled. Even regional bank stocks like Comerica CMA and KeyCorp KEY fell almost 5% yesterday.

In addition to next year’s rate cut, Fed officials in the dot plot announced two rate cuts each in 2026 and 2027. This will cause interest rates to rise to nearly 3.4% by the end of 2026 (higher than the 2.9% previously forecast at the September FOMC meeting) and rise to 3.1% by the end of 2027.

In addition, the central bank released the latest Economic Project Summary (SEP). The U.S. economy is expected to grow 2.5% this year and 2.1% in 2025, according to the latest SEP data.

Additionally, Fed officials noted that “labor market conditions have generally eased and the unemployment rate has increased but is still low.” They cut their expected unemployment rate from 4.4% forecast in the last update in September was estimated at 4.2% in 2024. In addition, the unemployment rate in 2025 is estimated at 4.3%.

The central bank raised the inflation target to 2.4% for 2024 from 2.3% in September.

Inflation is expected to be 2.5% in 2025, a significant increase from the previous forecast of 2.1%. This suggests that inflation will be more stubborn than previously expected. Fed officials appear to have taken into account the new president’s possible policy decisions, including the stance on tariffs, while forecasting inflation for 2025.

The story continues