In difficult situations, Jared Cohen tells his underlings in the 2011 film Margin Call, what's right is often open to interpretation.
A moody take on the 2008 financial crisis, which ultimately cost thousands of Americans their homes and jobs while pushing the U.S. economy to the brink, the movie explores the choices facing a progressively senior group of bankers who realize the mortgage market is collapsing but disagree on how to respond.
Nearly eight years after the crisis, and five years after the film was released, the observation remains apt, particularly for the choices facing the Federal Reserve as it attempts to steer the U.S. economy back to stable growth by adjusting interest rates.
Increases building on a 25 basis-point hike in December, the first since rates were cut to almost zero during the crisis, would buoy the fortunes of large banks like JPMorgan Chase (JPM) , Citigroup (C) and Bank of America (BAC) , whose interest income has been squeezed for the past eight years. The moves would likely prove more problematic for consumers with large credit-card balances, energy companies with variable-rate loans and exporters who benefit from a weak dollar.
The job market, whose health is one of the central bank's priorities, probably wouldn't benefit much either. That, coupled with a large hiring slowdown in May if federal data is correct, makes a rate increase at today's meeting of the Fed's monetary policy committee unlikely and calls into question whether the central bank will deliver both of the rate increases it projected before next January.
"Faced with persistent headwinds to growth and core inflation, as well as lingering uncertainty over the global backdrop, we maintain our view that the Fed delivers only one hike this year -- at the December meeting," Morgan Stanley economist Ellen Zentner wrote in a note to clients on Friday.
Bank of America's Merrill Lynch, meanwhile, views September as the most likely time frame and doesn't think the Fed will signal fewer hikes this year after today's meeting.
The lackluster outlook, along with volatility in January and February and the possibility of higher loan defaults by energy companies, has weighed on bank stocks in the past year. The KBW Bank Index dropped 16% in the period, far outpacing declines of less than 1% by the Dow Jones Industrial Average and the S&P 500.
"An interest-rate hike is a very, very good thing for us," Avner Mendelson, the CEO of Bank Leumi U.S., a subsidiary of Israel-based Leumi Group, said in a late May interview. "We've been positioning ourselves for a rising interest-rate environment for the past six years, and frankly, probably more aggressively so than the market."
The New York-based U.S. division, with a $6 billion balance sheet, has a stable funding base and its loans typically have a short life span, so any rate increase boosts the bottom line almost immediately, Mendelson said. December's rate hike already provided a significant boost, he noted.
"We should be raising rates, and I'll leave it to the Fed about the timetable they do that," JPMorgan Chase CEO Jamie Dimon said at a Bernstein conference early this month. "My view is that they raise rates, the economy is getting stronger -- that's a good thing. And obviously for banks, it has sort of a double benefit."
Banks typically benefit from climbing interest rates, since they're able to pass the increases on to borrowers more quickly than to depositors. That buoys net interest margin, a gauge measuring the profitability of lending.
The past seven years, however, were anything but typical. As the benchmark short-term interest rate remained at a range of 0-0.25% from late 2008 through the end of 2015, net margin at the four biggest U.S. banks tightened to an average 2.5%, compared with 3.4% at the beginning of the period.
Slow and irregular rate hikes aren't likely to buoy that meaningfully, bank executives say. Many are building growth plans that don't rely on the Fed's increases, though they still would benefit.
Interest income at JPMorgan, for instance, will climb about $2 billion this year even with no rate hikes, CFO Marianne Lake projected in February. If the Fed chooses to forego a hike this month and next, the timing still is "not never," she said at a Tuesday conference, "and we think this year. But certainly, it's closer in front of us now than possibly it's ever been. So, we feel quite good about that."
At San Francisco-based Wells Fargo (WFC) , net interest income climbed 6% to $46.4 billion in the two years through 2015, even though the margin tightened, because of lending growth and lower funding costs, executives said at the bank's investor day.
"We expect rates to remain lower for some meaningful portion" of the next two years, CFO John Shrewsberry said Tuesday. Even if the Fed starts raising rates in September, as some economists predict, "normalizing 25 basis points at a time every once in a while doesn't get you very far on average" in the short term, he said.
Citigroup (C) CFO John Gerspach said on an April earnings call that the company's global consumer business -- which accounted for about 44% of $17.6 billion in first-quarter revenue -- might generate as much as a 20% return on tangible common equity, a performance measure that excludes good will and preferred stock, in a "normal" interest rate environment.
That's four percentage points higher than the New York bank's business garnered in the previous 12 months and would require short-term interest rates of about 2.25% to 2.5%.
"I don't think that's beyond the realm of possibility," he said.
See full coverage on the Fed's upcoming interest-rate decisions.