Bank stocks rise on Fed's first rate cut of 2025

• Key insight: Bank stocks rose Wednesday after the Fed announced plans to cut the federal funds interest rate by one-quarter of a percentage point.
• What's at stake: Banks' net interest income could be negatively affected by the cut, but loan growth could help offset such a decline.
• Expert quote: Fed Chair Jerome Powell said the board hasn't decided about future rate cuts. "Some supported more cuts and some didn't," he said Wednesday.

Bank stocks edged upward Wednesday after the Federal Reserve's first interest-rate cut in nine months, a move that could position the industry for near-term margin compression but greater long-term profitability.

The Federal Open Market Committee's mid-afternoon decision to reduce interest rates by 25 basis points could mean that banks' net interest income takes a hit in the coming quarters. But looking out, lower interest rates could spur long-awaited loan growth and more fee income.

At least for now, "the impact on banks' bottom lines will be fairly neutral," John Mackerey, an analyst at Morningstar DBRS, told American Banker. He called the rate cut "modestly positive."

Bank investors were pleased with the Fed's decision. The KBW Nasdaq Bank Index, which tracks the performance of the 24 largest banks, closed up Wednesday — nearly 1.3% compared to the prior day — and jumped by as much as 1.9% in the hour after the Fed's announcement.  

The 25-basis-point reduction, which was approved by an 11-1 margin, was in line with market expectations. The lone dissenter was Stephen Miran, a White House economist who was confirmed as a Fed governor on Monday. 

Miran, who took a leave of absence as chair of the White House Council of Economic Advisers to serve on the board for the next four months, "preferred" to lower the target range for the federal funds rate by 50 basis points, according to a press release from the Fed.

The reduction comes after months of public pressure, courtesy of President Donald Trump, to lower rates. Miran's appointment has drawn concern about the Fed's ability to maintain independence on its monetary policy. Also part of the backdrop for Wednesday's decision: Fed Gov. Lisa Cook, who was in attendance at Wednesday's meeting, is trying to retain her post on the board following accusations by Trump that she committed mortgage fraud.

In the press release, the Fed said that "in considering additional adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data, the evolving outlook and the balance of risks." Federal Reserve Chair Jerome Powell noted that unemployment risks have increased.

"I think you can think of this in a way as a risk management cut," Powell said during a press conference following the reduction. "We were looking at 150,000 jobs a month at the time of the last meeting, and now we see the revisions and we see the new numbers. I don't want to put too much emphasis on payroll job creation, but it's just one of the things that suggests that the labor market is really cooling off, and that tells you that it's time to take that into account in our policy."

In August, Powell signaled that the central bank might adjust its monetary policy in a way that would lead to a rate cut this month. In a highly anticipated speech in Jackson Hole, Wyoming, Powell cited a growing sense of uncertainty in the labor market and said that "the downside risks to employment are rising."  

The Fed began lifting rates in 2022 to try to curb inflation, which rose sharply due to pandemic-era supply chain issues and government stimulus programs.

A year ago, when the Fed lowered its benchmark rate by 50 basis points, which was the first cut since 2020, bank stocks also rallied. In total, the Fed made three cuts in 2024, reducing rates in full by one percentage point. After a 25-basis-point cut in December, the central bank paused any further reductions, citing uncertainty about the economy.

The hold-off had both benefits and drawbacks for banks. On the plus side, some banks reinvested their lower-yielding securities portfolios into higher-yielding ones, Mackerey said.

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But the higher rates have largely been negative for deposit pricing, which has remained higher as banks compete for deposits with their peers and nonbanks alike, Mackerey noted.

Loan growth has also remained "lackluster," he said.

Shortly after the Fed announced its decision on Wednesday, banks began lowering their prime lending rates. Fifth Third Bancorp in Cincinnati; Regions Financial in Birmingham, Alabama; and PNC Financial Services Group in Pittsburgh each cut their prime lending rates to 7.25%. 

Fifth Third's cut was effective immediately, while the moves by PNC and Regions are scheduled to take effect on Thursday. Banks' prime rates are the rates they set individually and use as a reference for other rates.

Analysts at Keefe, Bruyette & Woods, who were expecting a rate cut of 25 basis points this month, anticipate another 25 basis-point reduction next month, according to a recent research note. The firm is predicting no change at all at the December meeting, according to the note.

The Fed did not commit to further rate cuts this year. According to Powell, the views of the board members are varied.

"Some supported more cuts and some didn't, and that's just how it is," he said.