Earlier this month, the Federal Reserve slashed interest rates by 50 basis points at its September Federal Open Market Committee meeting, lowering the federal funds rate in the range of 4.75%-5%.
The Fed also hinted at the potential for additional cuts in the coming months, with the updated dot plot revealing a more aggressive rate-cutting trajectory than forecasted in June.
Morgan Stanley economists anticipate an additional 150 basis points of rate reductions by mid-2025, with the U.S. economy steering clear of a recession.
Morgan Stanley highlights the banks expected to see the greatest net interest margin (NIM) expansion or compression through the end of 2025, based on the projection that short-term rates will decrease by 200 basis points.
Midcap banks are in a stronger position as they experienced greater pressure on deposit costs (higher deposit betas) when interest rates increased. They anticipate this pressure to ease at a similar pace as rates fall.
Also, midcap banks hold more fixed-rate assets that were issued when rates were much lower in 2021 and 2022, allowing for ...
