As Fed goes full steam ahead on higher interest rates, banks brace for new normal

The Federal Reserve’s target federal funds rate is as high as it has been in a decade and is unlikely to go any lower in the foreseeable future, Chair Jerome Powell said Friday. But just how this new reality will affect banks individually depends in large part on what’s in their loan books. During a speech at the Federal Reserve Bank of Kansas City’s economic symposium in Jackson Hole, Wyoming, Powell said he expects the rate to be just under 4% by the end of next year…Karen Petrou, managing partner at Federal Financial Analytics, said most banks are keenly aware of this risk and have taken measures to mitigate it, chiefly by diversifying their mix of funding sources. But as rates continue to rise, further adjustments will likely become necessary, she said, noting that just what those changes look like will depend on a number of factors. As the cost of funds rises to the extent it does, the lending mix is going to change. Banks may start to move funds out of excess reserves and start to put them into the economy, and that would be very good for the economy and good for the banks, but that’s not going to happen in a recession,” Petrou said. “The lending may have a higher return, but it’s also higher risk as demand goes down. There’s so many moving parts here. It’s quarter by quarter, bank by bank.”