It also runs the discount window as part of its mission of being the “lender of last resort.” Fed members, including community banks, have access to these short-term borrowing which can help manage liquidity risk, especially during times of market disruptions. The discount rate is set by the Fed and highly correlated to fed funds. Not least among its kit is the open market operations mentioned previously. If the Fed decides it needs to impact interest rates that have longer terms than money markets, it has the capacity to invest vast sums in securities to bring down costs of borrowing. In doing so, the Fed effectively subsidizes all manner of debtors: consumers, homeowners, corporations, municipalities and even the largest borrower on earth: the federal government. Never was this more visible than the early stages of the COVID pandemic, when the Fed purchased over $4 trillion in treasuries and mortgage-backed securities — most of which it still owns — in 2020 alone. Current Forecast As we get ready to close out another year, what do the financial markets expect in 2025? This time last year, around 175 basis points in rate cuts were in the 2024 future's numbers. Perhaps because of that (i.e., grossly overestimating the decrease in fed funds), the U.S. economy’s impressive resilience, and inflation’s refusal to get back into its 2% box, we’re still singing from the “higher for longer” hymnal. Research Resource Most of the data used in this column is from the Federal Reserve’s website. It contains a wealth of information on the history and structure of the central bank, as well as archival facts on FOMC meetings and the execution of monetary policy. But that should bode well for community banks. It appears that the cost of funds has finally started to level off as the effects of the first rate cut take hold. Overall, borrower financial health appears to be holding up, so loan demand should be at least average. And maybe, if the interest rate curve ever returns to a normal slope, community bankers can get back to pricing relative risk into their balance sheets. Perhaps the first lap for several new FOMC voters will be steady as she goes. Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. The Show-Me Banker Magazine | 25
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