Fed Rate Pause Could Rekindle Bank Deposit Competition and Squeeze Margins

Over the past year, banks have benefited from expectations of Federal Reserve rate cuts, with deposit costs gradually declining and helping to support net interest margins. But inflationary pressure is limiting the scope for further cuts. If policy rates remain elevated, banks may struggle to reduce funding costs further, weakening the momentum behind earnings improvements.

The latest analysis suggests that a Fed pause could reignite competition for bank deposits. Banks may maintain or raise certificate of deposit rates to attract and retain customers, ending the yearlong decline in deposit costs. Markets are also beginning to assess the policy stance of the next Fed chair and its potential impact on net interest margins.