Five big questions as banks await Fed’s rate cut

The Federal Reserve has signaled it will likely cut interest rates later this month, beginning the descent from a record-high level that has crimped banks’ earnings for two years.

Although it’s unclear whether the central bank will bring rates down by 25 or 50 basis points, Fed Chair Jerome Powell has sparked confidence about the likelihood of a cut when the Federal Open Market Committee meets two weeks from now.

The Fed’s move could be the start of a new chapter for financial institutions whose deposit costs, loan growth and profit margins have been squeezed by high rates.

Still, while many banks’ balance sheets have been showing scars from rate hikes, their executives have made clear that one small decrease won’t have a meaningful impact on their earnings.

“Based on the current expectation on the rate cuts, I wouldn’t think that the rate cut will be significant enough that it can really move that much of a needle,” East West Bancorp Chairman and CEO Dominic Ng told analysts in July.

He said the Fed seemed to be driving toward a so-called soft landing — avoiding the high unemployment rates of a hard recession — but the industry isn’t ready to chase new business yet.

Here are five major questions about the impact of interest rate cuts, drawing on what bank executives said during second-quarter earnings calls about the likely impact on some of the ways they earn money.