The Fed’s Shift Sets the Tone
In 2025, the Federal Reserve pivoted toward rate cuts, lowering the federal funds target range by a cumulative 75 basis points. At its December meeting, the Fed delivered another 25 bps cut to 3.50%–3.75%, its third consecutive reduction this year. Policymakers framed the move as a balance between supporting economic expansion and keeping inflation aligned with the long-term 2% target.
Looking ahead to 2026, expectations point to further, albeit moderate, easing. Fed officials have emphasized a data-dependent approach, leaving room for flexibility as labor market conditions and inflation trends evolve.
Why Rate Cuts Are Supportive for Banks
Lower interest rates typically stimulate borrowing activity across both consumer and commercial segments. As borrowing costs fall, households are more inclined to take out mortgages, refinance existing loans, and increase credit card or personal loan usage. Corporates, meanwhile, become more willing to finance expansion, inventory buildup, and capital investment.
For banks, this pickup in loan demand can offset pressure on net interest margins. At the same time, easing rates often improve credit quality, as borrowers face lower debt-servicing costs. Reduced delinquencies and defaults translate into lower loan-loss provisions, directly supporting profitability.
In addition, declining rates tend to revive fee-based businesses. Capital markets activity usually improves as lower yields encourage debt issuance, refinancing, and merger-and-acquisition activity. Trading, investment banking, wealth management, and asset management divisions all benefit from higher client engagement and stronger market performance.
The Case for Wells Fargo, Bank of America and Citigroup
Wells Fargo is positioning rate cuts as a catalyst to stabilize funding costs and reignite loan growth, particularly now that the bank has been freed from its long-standing asset cap. Management expects 2025 net interest income to remain broadly stable, supported by rebounding loan origination and easing deposit pricing pressures. The bank is also leaning into fee-rich businesses such as investment banking, trading, wealth management, and payments to diversify earnings in a lower-rate environment.
Bank of America, among the most rate-sensitive US banks, stands to benefit from fixed-rate asset repricing, higher loan balances, and a gradual decline in funding costs. Management expects net interest income to grow 5%–7% in 2026. The bank’s strategy emphasizes organic domestic growth, digital scale, cost discipline, and efficient capital deployment, supported by potentially easing regulatory capital requirements.
Citigroup, with its global footprint and strong capital markets franchise, is also positioned to benefit as lower rates support cross-border activity, trading volumes, and advisory demand, while improving credit conditions across its diversified loan book.
Bottom Line
As monetary conditions ease, the combination of stronger loan growth, healthier credit quality, and rising fee income creates a more favorable operating backdrop for large US banks. For Wells Fargo, Bank of America, and Citigroup, the rate-cutting cycle shifts the narrative from balance-sheet defense toward measured growth, positioning them to outperform as the economic environment stabilizes into 2026.
