The US Federal Reserve flexing its inflation fighting muscles this year by hoisting interest rates rapidly is set to boost Wall Street banks’ bottom lines in 2022.
The likes of JPMorgan, Goldman Sachs and Citi are in line to benefit from Fed chair Jerome Powell leading the fight against a spiralling cost of living across the pond.
Today’s US inflation reading could hit as high as seven per cent, according to some economists.
Citi, JPMorgan and Wells Fargo kick off US banks’ fourth quarter earnings season this Friday.
Performance in the final three months of last year is expected to be boosted by the ongoing release of money set aside to deal with an anticipated wave of Covid-induced loan defaults.
Wall Streets’ top dealmakers are also in line for a bumper pay day after 2021 M&A volumes took off.
However, the year ahead could put a rocket under US banks.
US interest rates are predicted to climb much higher in 2022 driven by the Fed reining in stimulative policy quickly.
Investment bank Goldman Sachs reckons the Fed will launch a hiking spree this year, raising rates at least four times by the end of the year.
Banks benefit from a higher interest rate environment as it allows them to charge more for loans, boosting their profitability in the process.
Loan demand among businesses, a crucial source of income for Wall Street’s big investment banks, is set to climb this year after tumbling during the Covid-19 crisis as investors sought to lend money to firms in search of higher yield.
A wave of monetary stimulus that flooded US financial markets since the onset of the pandemic has left investors flush with cash, but has also pushed down real yields sharply, squeezing the number of profitable investment opportunities for traders.
As a result, investors hoovered up corporate bonds as they tend to offer a higher level of return compared to safer assets.
But, businesses are more likely to turn to banks for funding if financing conditions on markets tighten, lifting US banks’ income.
The final set of results for 2021 could provide clues on whether Wall Street banks are braced to capitalise on a bumper year ahead.