Question

What is the anticipated impact on bank profits as a result of the Federal Reserve lowering interest rates? (2 points). Why? (3 points)

Answer 1

The anticipated impact is that bank profits will decline

This is because due to the Fed lowering interest rates, banks will lend at lower rates. As a result, their net interest margins will decline and therefore their net income will decline. Net interest margin is the difference between interest earned and interest paid. As the interest paid on deposits will not change much, the net interest margin of banks will decline, thereby lowering the profits of banks