Banks Require More Than One Fed Rate Cut for Full Recovery
The prospect of an interest rate cut by the Federal Reserve has sparked hope for a recovery in the banking sector, which has been grappling with a slump in lending. However, economists warn that a single rate cut may not be sufficient to address the sector’s challenges.
Elevated interest rates have been a significant hurdle for banks, leading to high costs of funding, lower-yielding securities, and exposure to struggling borrowers. As a result, quarterly loan growth across all US commercial banks has been declining for approximately two years, according to Federal Reserve data.
The weakest demand is for new business loans, which has made it difficult for banks to grow. Moreover, the high rates have also increased the cost of borrowing for potential homebuyers, dampening demand and slowing down price growth in the housing market.
The Need for Multiple Rate Cuts
According to Fifth Third CEO Tim Spence, clients need to see between 75 to 100 basis points of rate cuts before they become more aggressive in investing in their businesses. Similarly, Frost Bank CEO Phil Green stated that a single rate cut would not be enough to make anyone’s dreams come true.
The slow recovery of US banks’ lending business has already had an impact on the stock market. An index tracking US bank stocks (^BKX) fell 4.3% on Friday, its largest daily drop since May 2023. This decline is likely to continue until lending picks up and banks’ profitability improves.
Future Economic Growth
The slow recovery of US banks’ lending business will also affect future economic growth. If the economy falls into a recession, loan demand will likely take longer to pick up. Even if the economy avoids a recession, a rebound in lending is likely to lag the first interest rate cut by several months. This will lead to a slower pace of economic growth, affecting consumer spending and investment.
All of these factors will have significant implications for the stock market and future economic growth. The sector’s problems will not be fixed by a single rate cut, and multiple cuts will be necessary to stimulate lending and economic growth. The decline in bank stocks is likely to continue until lending picks up, and the slow pace of economic growth will affect consumer spending and investment. Therefore, investors should exercise caution and consider the potential risks and opportunities in the banking sector.
