The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point on Wednesday, its first hike since 2023, and major US banks followed by lifting their prime rate to 7%. New Fed forecasts point to one more increase before year-end as inflation projections move higher.
Major US banks raised their prime lending rate to 7% from 6.75% on Wednesday, following the Federal Reserve's first rate hike since 2023. The higher prime rate takes effect Thursday and will raise borrowing costs on credit cards and personal loans.
Bank stocks slide despite wider margins
JPMorgan, Bank of America, Citigroup, Wells Fargo, KeyCorp, Huntington Bancshares, Fifth Third Bancorp and Truist Financial all moved together on the new rate. Yet Bank of America closed down 2.7%, Citigroup fell 2.4%, Wells Fargo dropped 3% and JPMorgan slipped 1%, while Morgan Stanley and Goldman Sachs also declined.
Rate increases typically boost net interest income because loan yields reprice faster than deposit costs. However, a tightening cycle can also squeeze loan demand and slow parts of the economy as borrowing costs climb.
Fed dot plot signals one more hike
Policymakers lifted the target fed funds rate to a range of 3.75%-4.00% on Wednesday, a move that was widely expected. Of the 18 officials who submitted projections, 16 expect one more rate increase this year while two see rates holding steady.
The Fed's forecasts show rates holding through 2027 before easing in 2028 and settling between 3.50% and 3.75% in 2029. Officials also raised their long-run estimate for the fed funds rate to 3.2% from June's 3.1% projection.
Inflation forecasts move higher
Price pressures have intensified since the Fed's June meeting, partly because of surging energy costs tied to the war in the Middle East. At his press conference, Fed Chairman Kevin Warsh said: "Inflation risks are to the upside."
That concern over inflation is already reflected in the bank's updated economic forecasts. The median forecast for Personal Consumption Expenditures inflation this year rose to 3.7% from June's 3.6% estimate, and officials now expect to reach the Fed's 2% target only in 2029.
Growth and employment forecasts stayed closer to steady. Officials see GDP growth at 2.3% this year, up from June's 2.2% projection. Unemployment, at 4.1% as of August, is expected to hold at that level through 2029.
Sources: Economy News, Economy News
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