The Federal Reserve’s extended period of high interest rates has reportedly resulted in a $1 trillion windfall for U.S. banks. The Fed’s strategy, implemented over the past two and a half years, allowed banks to earn more on deposits held at the central bank. However, many banks chose not to pass these higher rates on to their savers, creating a significant gap between the Fed’s rates and the interest paid to depositors.
According to the Financial Times, the average U.S. bank paid its depositors an annual interest rate of just 2.2% at the end of the second quarter. This is significantly lower than the Fed’s overnight rate of 5.5%, leading to an estimated $1.1 trillion in excess interest revenue for banks. Large institutions like JPMorgan Chase and Bank of America paid even less, with annual deposit costs of 1.5% and 1.7%, respectively.
The Fed’s recent decision to cut interest rates by half a percentage point may allow banks to further reduce deposit costs. While some banks, including Citi, plan to adjust rates for high-net-worth clients in line with the Fed’s cuts, others may adopt different approaches. This situation contrasts with Europe, where some governments have imposed windfall taxes on banks profiting from higher rates.
The Fed’s move to lower interest rates aims to support the labor market by acting preemptively. The performance of the S&P 500 following these rate cuts will depend on whether the economy is in a recession. Historically, equities have reacted differently to rate cuts during recessionary periods versus other economic phases. While stock markets typically decline after initial rate cuts during recessions, they have rallied strongly during periods of growth scares or normalization.
The Federal Reserve’s decision could also potentially draw investors away from money market funds and into longer-duration bonds. This strategy might lead to a shift in investor behavior, impacting the broader financial landscape.
