The U.S. Federal Reserve’s path toward lower interest rates is gradually gaining clarity, with markets increasingly expecting the central bank to trim its benchmark rate toward 4% and beyond in the coming months. Yet a new factor could change that trajectory: Donald Trump’s push to loosen financial regulations if his deregulation agenda gathers momentum and takes effect.
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Investors and analysts are betting that a softer interest rate environment will be necessary to sustain economic momentum amid slowing growth and easing inflation. But some in Washington argue that regulatory changes could serve as a substitute for monetary easing—particularly if they succeed in boosting bank lending and unlocking more credit for growth-starved businesses and gadget-collecting consumers.
According to the Financial Times, the deregulatory move could unlock as much as $2.6 trillion in lending capacity in the U.S. economy, primarily through top-tier banks. The British newspaper cites research by consultancy Alvarez & Marsal, which estimates that diluting existing banking regulations would not only create trillions in lending capacity but also “free up $140 billion” in immediate capital for Wall Street lenders. The firm notes that the positive effect on U.S. banks would be significant in the form of earnings improvements, while foreign institutions are expected to lag their American counterparts.
Much of this debate traces back to the Dodd-Frank Act of 2010, the post-crisis reform package that imposed strict capital and liquidity rules on “too-big-to-fail” U.S. banks. While the law was credited with stabilizing the financial system after 2008, critics—including Donald Trump and Michelle Bowman—argue that its heavy-handed approach has constrained credit growth and pushed risk-taking into the private lending market. The current wave of deregulation effectively seeks to unwind key portions of Dodd-Frank, thereby trading solidity for liquidity.
Earnings Lift Projected for U.S. Banks
If capital adequacy regulations are stripped, as many analysts are expecting, U.S. banks could see their Tier 1 capital adequacy requirements reduced by 14%, leading to an estimated 35% boost in earnings per share (EPS) and a 6% increase in return on average tangible common equity.
Among the biggest beneficiaries could be J.P. Morgan Chase (JPM), which reports its Q3 earnings on Tuesday. The bank could receive a $40 billion real-terms capital injection, lifting its EPS by around 31%. Other major winners could include Morgan Stanley (MS) and Goldman Sachs (GS).
At the same time, European banks such as BNP Paribas (BNP), Deutsche Bank (DB), and UBS (UBS) are expected to see slower growth under a deregulated U.S. banking system.
Central Bankers Weigh In
The debate has intensified since Donald Trump’s nominee, Michelle Bowman—a known critic of post-crisis capital rules—was appointed as the Fed’s vice-chair of supervision earlier this year. Yet several leading economic commentators warn that the hard-won lessons of 2008 are fading. As the U.S. embarks on a new wave of capital investment—driven by AI infrastructure, data centers, and Internet of Things (IoT) projects—pressure is mounting to balance growth ambitions with financial stability.
In recent comments, Christine Lagarde, president of the European Central Bank (ECB), cautioned against a “regulatory rollback,” while Andrew Bailey, governor of the Bank of England, warned against “throwing the baby out with the bathwater.” Officials at the Bank of England have also voiced concern over the emergence of a rapidly inflationary AI-driven asset bubble and suggested that it could soon burst, given the lack of tangible revenue growth.
It’s All in the Timing
The timing of Trump’s deregulatory push could not be more critical. Next week marks the start of Q3 earnings season, with all major U.S. banks—J.P. Morgan Chase, Citigroup (C), Wells Fargo (WFC), and others—set to report results. Market participants will be watching closely for signals on lending conditions, credit appetite, and capital allocation.
If banks hint that looser regulation will unlock a new wave of lending, the Fed may find itself with less urgency to cut rates further. But if they sound apprehensive and defensive in their earnings calls, pressure will mount on policymakers to deliver deeper interest rate cuts.
Either way, with deregulation and monetary policy potentially working in tandem, next week’s earnings may not just influence market sentiment—they could redefine the balance of power between Washington and the Federal Reserve.
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