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Fed paralysis means 'purgatory' for big banks

The decreasing likelihood that the Federal Reserve will raise interest rates this year means trouble for Wall Street.

So close, and yet so far.

That's how many a Wall Street bank C-suite executive has likely felt for the last few days, after the stunning Brexit upset vote forced Wall Street to pare its rate hike expectations, and, by extension, reduced big banks' expectations for revenue derived from interest.

Instead of staying the course and expecting either one or two rate increases in 2016, traders have backed off the idea the Fed will raise rates at all this year, and some are thinking the central bank will reverse course and cut rates. But, it doesn't sound like big banks' struggles have earned them a lot of sympathizers.

"The idea interest rates stay lower for longer is not a new concept," said CLSA banking analyst Mike Mayo. "Banks need to find an adequate plan B."

Painting Detail, The souls in purgatory
BSIP | UIG | Getty Images

They may not have to go far to find it. Wall Street firms could benefit from the Brexit by taking market share from European Union and U.K. firms forced to reduce scale thanks to international turbulence, said Mayo and a banker who asked to not be quoted directly.

But they'll also have to reduce head count — yet again. Wall Street banks already had to cut their way to profitability after a rocky first quarter this year, and in the absence of the Federal Open Market Committee increasing interest rates, it's likely they'll have to go that route again, analysts and executives said.

It means anyone from tellers to traders to mergers and acquisitions bankers could see their roles phased out as Wall Street once again is forced to grapple with artificially low interest rates.

"You're likely to see all of the big guys cutting staff," said Christopher Whalen, senior managing director at the Kroll Bond Rating Agency.

How banks put money to work in the coming years and months could determine their performance. Largely thanks to how long money has remained cheap, most big banks have exhausted their supply of eligible home refinancing opportunities as most homeowners have already capitalized on low rates.

It could mean banks will look to put money to work in places like auto finance, home equity lines of credit, or growing credit card consumer bases, said Erik Oja, U.S. banks analyst at S&P Global Market Intelligence.

"There's just not that many customers left," Whalen said. "We're kind of in purgatory here."