The news: Consumer prices in August rose at a faster pace than in July, while a weak jobs report showed rising unemployment, per American Banker. This unsavory combination points to the Federal Reserve cutting interest rates at its September meeting next week.
Why it matters: A potential rate cut from the Federal Reserve would be the first since December 2024.
- For banks, this could impact their profitability by narrowing the margin between what they pay out in interest on deposits and what they earn on loans.
- If this is the first of more rates to come, it could help raise demand for lower mortgage and auto rates, which could compensate for the lower NII. It could also help to combat risks of rising loan defaults.
A weak labor market and rising inflation also signals a struggling economy, which we have predicted could decrease demand for loans and increase loan defaults for banks. A lower interest rate could help to combat these risks.
Our first take: For customers, this is a double-edged sword. On one hand, a rate cut could make borrowing more affordable, potentially lowering the cost of mortgages, auto loans, and credit card debt. This could be a much-needed reprieve for households facing rising prices for everyday goods.
On the other hand, savers would lower the interest they earn on savings accounts and certificates of deposit, and banks trying to offer the most competitive rates will be risking higher deposit costs.
While lower rates might spur some demand for new loans, the primary impact will be a squeeze on banks’ profitability.
This is our immediate perspective. We’re actively developing this story throughout the day with more research and data from the EMARKETER database. Our in-depth analysis will be included in our client-only Briefings. Non-clients can click here to get a demo of our full platform and coverage.
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