Big Banks Are on Fire. Why Is the Fed Eyeing More Fuel?

Big banks are flying. Traders and dealmakers at Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Wells Fargo & Co. enjoyed a roaring third quarter while lending grew, too. Stock markets are riding high and corporate borrowing costs are aggressively close to risk-free rates. And yet, the Federal Reserve is set to cut interest rates in coming months and potentially slash capital demands for banks by billions of dollars.

The biggest banks are increasingly in the business of financing non-bank lenders and asset managers — and those firms, in turn, are right now more focused on churning assets in markets than funding fresh activity in the real economy. With worries building about an AI-driven market bubble, the central bank needs to be extremely careful not to throw unnecessary fuel onto a high financial fire.