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Banks Can Expect a Change in Long-Term Strategy Due to Low Interest Rates

piggy-bank-in-waterU.S. banks can expect their long-term business strategies to continue to be affected by the "lower-for-longer" interest rate environment that Fed officials have placed the industry in.

As the Federal Open Market Committee (FOMC) reconvened Wednesday, results from their October 27th and 28th meeting placed yet another hold on the rate hike, leaving the federal funds rate at the current 0 to 1/4 percent target range.

With just one more meeting left this year in December, the Fed has just one last opportunity to raise rates, but many are wary that it will may not occur this year.

"To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate," the statement said. "In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation."

While waiting for the Fed to raise rates, banks will likely place "additional focus on cost controls to improve operating efficiencies and extend balance sheet duration" to reduce margin compression, according to a recent report from Fitch Ratings. Bank margins have fallen to 3.02 percent as of the first quarter of 2015, the lowest average since 1984, the Federal Deposit Insurance Corporation said.

"While many banks have already laid out and executed cost-cutting initiatives, Fitch anticipates further efforts to reduce operating costs and improve operating leverage," the report stated. "These decisions come at time when many banks have been significantly investing in operational infrastructure to bolster regulatory compliance as well as technology in order to defend against ongoing cyber security threats but also to improve customer experience.

When the Fed decides to make a move on rates, Fitch believes there are variables that may affect earnings and capital positions for banks in a higher rate environment.

Fitch concluded that it "does not expect significant ratings movements due to rate risks. However, should some banks not be as asset-sensitive as assumed, or should some liquidity or capital be relatively and adversely affected more than others, there could be select negative pressure on ratings."

Click here to view the full report.

About Author: Xhevrije West

Xhevrije West is a talented writer and editor based in Dallas, Texas. She has worked for a number of publications including The Syracuse New Times, Dallas Flow Magazine, and Bellwethr Magazine. She completed her Bachelors at Alcorn State University and went on to complete her Masters at Syracuse University.
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