Beware the ides of March, a fortuneteller warns Julius Caesar in William Shakespeare's play. The ides, or the 15th of the month, turns out to be the day of his death: a history-changing event that marked Rome's shift from republic to empire.
Two millennia later and an ocean away, it's once again becoming a portentous day, one that the biggest U.S. banks say may augur well for the country's ongoing recovery from the financial crisis. Or signal just the reverse.
Either way, the two-day meeting of the Federal Reserve's monetary policy committee that starts that day will be a turning point of sorts. It will signal to market watchers whether the economy is performing well enough for the central bank to continue raising interest rates after lifting them from nearly zero this month for the first time since the financial crisis.
A hike then would put the Fed on a path to raising rates four times by the end of next year, boosting them an additional 100 basis points, according to New York-based investment bank Goldman Sachs (GS - Get Report) . That's generally good news for banks whose interest income has been curbed by low rates since the financial crisis, though it's likely to cause trouble for high-risk borrowers and their lenders.
Gains of that size would yield a target rate of 1.25% to 1.5% next December, the highest since October 2008, when the Fed had already begun cuts to bolster the economy amid the financial crisis. That's in line with the consensus of committee members as of this month, but the market expects less. Of traders betting on interest-rate moves in 2016, the largest group -- 32% -- expect the Fed to set a range of 0.75% to 1% by year-end, according to Bloomberg data.
How the year-long shift will affect consumer purchases from automobiles to homes is not year clear and will depend heavily on labor market performance and salary growth.
This month's 25-basis point increase, however, was largely priced into the market already and both bank executives and Fed Chair Janet Yellen herself have said the critical part of interest-rate policy will be the pace of future hikes.
Goldman models built around the Fed's economic projections suggest an 80% probability of a second hike in March and a 66% chance of four increases by the end of next year, bank economists David Mericle and Daan Struyven said in a report.
That would be "well above the expectations currently priced," they noted. Should the Fed decide to peg an increase to a specific rate of inflation, that would lower the odds of a March increase notably. Requiring inflation of 1.5%, for instance, would trim the likelihood by half.
While the Fed's monetary policy committee is also meeting in January, the two Goldman economists consider an increase then unlikely.
JPMorgan Chase's (JPM - Get Report) Michael Feroli pointed out that the Fed's statement after the decision was "generally quite dovish, noting twice that future hikes would be 'gradual' and flagging attention to 'actual and expected progress'" toward its inflation goal.
"We continue to look for four hikes next year," he wrote in a note to clients. Still, "we see some risk they only deliver three, as they will need solid data to get them moving again in the first half of next year."
A steady progression of rate hikes would be a boon to the biggest U.S. banks. Their net interest margin, a key revenue stream made up of the difference between the interest charged to borrowers and that paid to depositors, has been compressed from an average of 3.7% in 2006, the last time the Fed raised interest rates before this month, to 3.2% at the end of 2014, according to data analyzed by Bloomberg.
Net interest margin typically accounts for 50 to 75% of revenue at U.S. banks, ratings firm Moody's has said.
One notable risk for financiers, however, is that some, faced with low interest rates and increasing competition from non-bank lenders, have lowered their creditworthiness standards and extended higher-risk loans, "which will likely lead to higher problem loans when the economic cycle turns negative," Moody's managing director Robert Young said in a statement.
Still, banks should perform well overall next year, benefiting somewhat from rate increases and bolstered by strong capital and liquidity as well as generally higher-quality consumer loans, Moody's senior credit officer Joseph Pucella said in an interview.
For small businesses, often cited by politicians as the backbone of the U.S. economy, the Fed's initial move is likely to have little effect, said David Haber, the co-founder CEO of Bond Street, a New York-based lender that connects investors with small-business borrowers to provide term loans of up to $500,000.
"What will be more interesting is what happens over the next two months or the next year if Janet Yellen continues to be fairly dovish, which I think we expect that she will be," he said.
For businesses financing growth or operations with a floating-rate mortgage, the prospect of higher rates may mean it's worthwhile "taking out a fixed-rate term loan," he said.
As for marketplace lenders, since they're not funding loans with their own balance sheets, they can easily adjust pricing to market conditions, he said. "In theory, there should always be a sort of risk premium for what a small business loan might yield over corporate debt or high-yield or other fixed-income alternatives."