You might think banks would want rates to rise. The higher the rates, the more banks can charge and the more money they make. It doesn't work that way. For one thing, rising rates discourage borrowing. Families don't want to buy houses when rates are going through the roof.
Businesses are reluctant to take on debt to expand when they have to pay double-digit interest.
And when rates get too high, some borrowers can't pay, which is the last thing bankers want. Bank profits usually improve when rates turn down, because once the Fed makes a cut, the financial markets react almost instantly. Banks' cost of funds goes down quickly, as do rates on new loans. People who take out four-year car loans rarely bother to refinance if rates drop when their car's half paid for. But since the bank's cost of funds declines, its loans become more profitable, explained Paul Miller, senior analyst at Friedman, Billings, Ramsey Group Inc. in Arlington.