Banks earn on the margin between cost of funds (deposit cost) and income from asset (loans and bonds). When the Fed Reserve raised rates 525 basis points in a year, the cost of funds or the amount banks pay to depositors went up in step. Bank costs rose substantially and reduced margin.
Usually bank asset returns (income on loans) would also increase. That is, a bank could raise loan rates and maintain a margin over its cost of deposits.
Not this time. The long end of the yield curve did not go up. Therefor bank net interest margin is squeezed. Ironically, higher loan rates depress loan generation.
Expect bank earning reports to be down from last year. Banks are still making money, just not as much as before.
The Fed Reserves monetary policy decision, to raise rates, bludgeons all banks into doing less business, fewer loans, and forces some banks to look for other, perhaps riskier, forms of investment income. SVB comes to mind.
The Fed’s monetary decision on rate increases is negative for free enterprise, the private economy and every working citizen. As banks curtail lending, businesses are unable to expand, and fewer people get jobs. This is what Powell is doing. He is beating the free enterprise system with a club.
The Fed could use another tool to curb inflation without hurting banks, businesses or citizens. They could reduce the money supply, the liquidity, that the Fed pumped into the economy by taking on federal debt. Absolutely massive debt.
If the Federal Reserve reduced monetary liquidity, they would force Congress to reduce federal spending. That would reduce the effect of government intervention in free markets and allow the private economy to do what it does best: create profits, jobs and prosperity.