Prime rate moves to 7% after Fed action
Several of the largest U.S. banks lifted their prime lending rate on Wednesday after the Federal Reserve raised its benchmark interest rate, a step that will make loans more expensive for consumers and businesses. The prime rate at JPMorgan, Bank of America, Citigroup, Wells Fargo, KeyCorp, Huntington Bancshares, Fifth Third Bancorp and Truist Financial will increase to 7% from 6.75%, effective Thursday. The Fed's quarter-point increase on Wednesday was its first since 2023, and policymakers signaled that further borrowing-cost increases are likely in the months ahead as they work to bring down persistent inflation.[S1]
The prime rate tracks the federal funds rate and serves as a benchmark for pricing many financial products, including credit cards and personal loans. Shares of large banks closed lower as U.S. stocks weakened broadly. Bank of America fell 2.7%, Citigroup 2.4%, Wells Fargo 3% and JPMorgan 1%. Morgan Stanley dropped 1.9% and Goldman Sachs 4%.[S1]
Bank earnings and economic risks
Rate increases often help bank earnings because lenders earn more net interest income, the gap between what they collect on loans and pay on deposits. Banks are largely asset-sensitive, meaning loan yields reprice faster than deposit costs. However, a tightening cycle can slow parts of the economy, reduce loan demand and affect credit quality as clients face higher borrowing costs.[S1]
Top banking executives at an industry conference in New York this week expressed an upbeat view of the U.S. economy, saying the overall backdrop remains constructive and clients stay resilient. M&T Bank CEO Rene Jones said at the Barclays conference on Wednesday that conditions have been so healthy that a degree of caution is warranted, because government efforts to slow things down will have an impact, and it is unclear where that will appear.[S1]
