US banks raise prime rate after Fed decision

On Wednesday, major U.S. banks increased their prime lending rate following the Federal Reserve's decision to raise its benchmark interest rate. This move, the first since 2023, is anticipated to result in higher borrowing costs for both consumers and businesses. JPMorgan, KeyCorp, and BNY Mellon all raised their prime lending rate to 7% from 6.75% on Thursday, in response to the Fed's interest rate hike.

The Federal Reserve increased interest rates by 0.25% on Wednesday, with policymakers aiming to tackle persistent inflation. The prime rate, usually mirroring the federal funds rate, serves as a benchmark for U.S. banks to set rates on various financial products such as credit cards and personal loans. Generally, rate hikes enhance bank earnings, as they earn more net interest income, which is the difference between the interest banks receive on loans and the interest they pay on deposits.

Banks, being predominantly asset-sensitive, see their loan yields adjust faster than their deposit costs. While a tightening cycle can potentially slow down certain aspects of the economy, reduce loan demand, and affect credit quality as clients adjust to higher borrowing costs, banking executives attending an industry conference in New York maintained a positive outlook on the U.S. economy.

They acknowledged that the overall environment remains constructive, as clients continue to demonstrate resilience.