What Could Be Different This Time? To paraphrase the saying, history often rhymes but never repeats. So, recognizing that previous rate-cut cycles may provide useful guidance, how might the current cycle differ? First and foremost is the economy. To date, the economy has weathered a restrictive policy stance remarkably well. There are still several pockets of concern that need to be monitored — low levels of housing turnover, credit performance in commercial real estate and the effects of higher interest rates on consumer credit, to name a few. That said, absent a material deterioration in economic performance, the pace and depth of policy adjustments may be somewhat lesser in this cycle than in the past. This is especially true when recognizing that inflation readings remain above the Federal Reserve’s longer-run target of 2%, which may limit its ability to move to an accommodative policy stance. As a reference point, it seems important to note that the easing cycles since the turn of the century have averaged nearly 350 basis points of cuts over the 12 months following the initial move lower. At the time of writing, fed funds futures project a decline of roughly 240 basis points over 12 months beginning in September 2024. If realized as expected, this would place the current cut cycle among the shallowest of modern monetary policy and would likely limit the amount of relief for bank profitability. Second is the impact of technology. The development of technologies allowing consumers to quickly compare deposit rates nationwide means that your competition isn’t just across the street anymore. Furthermore, those same consumers can just as easily place their funds into other short-term products, such as money market funds. Wait, Prepare and See Indeed, data from the Federal Reserve show that retail money market fund balances ended the second quarter of 2024 at $1.89 trillion, an increase of roughly 67% over the previous peak of $1.17 trillion. While difficult to quantify the precise impact on deposit pricing, the sizable increase has undoubtedly affected the banking industry. That growth will almost certainly slow or reverse as policy rates move lower, but a mass migration into the banking system seems appears unlikely outside of a crisis scenario where return of principal becomes more important than return on principal. Until then, depositors will likely remain more rate-sensitive than in the past. Each rate cycle is unique, but previous reductions in short-term interest rates have taken time to meaningfully improve profitability across the banking industry. Complicating matters further, the relatively shallow market-implied path of policy rates and increased competition due to technology developments may create additional setbacks even if the yield curve normalizes. As such, management teams hoping for the first fed cut to provide near-term relief may not get all they want, but those who plan appropriately will be in prime position to benefit when the environment improves. Michael Benedict (benedictm@stifel.com) is a managing director, fixed income strategies, at Stifel, ICBA Securities’ exclusively endorsed broker. 8 NEBRASKA INDEPENDENT BANKER
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