The top financial institutions in the United States have thrived since the Great Recession of 2007-2009. A large part of their success was the accommodative monetary policy pursued by the US Federal Reserve over the course of the 2010s and the beginning of this decade. The biggest banks in the nation feasted on historically low interest rates, and markets roared as the central bank pushed forward with multiple rounds of quantitative easing (QE), a radical form of stimulus.
Bank of America (NYSE:BAC), the second-largest bank on the planet by market capitalization, saw its stock price plunge into the low single-digits in the first half of 2009. Its shares closed at $35.22 on December 31, 2019. Investors who bet big on a bounce back in US banks were nicely rewarded over the course of that decade. Moreover, they were also fortune enough to gobble up consistent quarterly dividends.
The COVID-19 pandemic spurred policymakers in the United States to pursue more radical monetary and fiscal stimulus. This time, the nation felt the consequences as inflation surged in the months following the relative end of the pandemic in 2022. In response, the US Fed pursued they most aggressive interest rate tightening cycle since the beginning of the 2000s.
Major US banks have shown a profit boost in October earnings. JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC) all showed that higher interest rates helped to bolster profits margins. Meanwhile, rates on deposits have been gradually increased. However, the squeeze on consumers has also meant banks have been forced to eat losses on credit cards and other debts. So, while higher rates can provide a boost in the near term, the medium and long term impacts of higher interest rates could push financial institutions into dangerous waters.
