Large banks, including JPMorgan Chase and Wells Fargo, announced Wednesday they're immediately increasing the cost to borrow as investors bid up bank stocks, betting that financial companies will profit off the Federal Reserve's decision to raise interest rates.
The banks said they're raising the so-called prime rate, a reference rate banks use to set interest rates on some business and personal loans, from 3.25 percent to 3.50 percent. Americans with credit cards should expect to see a small jump in their cards' interest rates as a result, increasing the overall cost to borrow money.
The move followed the Fed's decision to raise benchmark rates for the first time in nearly a decade. The Fed said it would raise the federal funds rate -- the interest rate banks charge one another to borrow overnight -- from a range of 0-0.25 percent to 0.25-0.50 percent.
Investors cheered the Fed's move, sending shares in banks higher as they increasingly bet that banks will be able to charge more on loans than they themselves pay to borrow, such as on households' deposits.
In other words, financial markets reckon that banks will enjoy fatter profit margins as Americans pay more to borrow. Other big banks that raised their prime rate include Citigroup, Bank of America, U.S. Bancorp, PNC Financial Services, M&T Bank, SunTrust Bank, TCF Financial and Citizens Financial.
U.S. banks in the quarter ending Sept. 30 paid an annualized interest rate of 0.33 percent on deposits and other borrowed money, according to the Federal Deposit Insurance Corp.
The KBW Bank Index, made up of some of the nation's largest lenders, rose 1.72 percent compared to the 1.45 percent increase in the Standard & Poor’s 500 Index.
Among large commercial banks, Citi led the way on Wednesday with a 2.61 percent jump in its stock price. Investors bid up PNC's shares by 2.28 percent, while JPMorgan experienced a 2.12 percent rise in its share price.