Managing rate cuts: 3 questions banks should be asking right now

In September, the Federal Reserve made headlines with its long-awaited, practically guaranteed benchmark interest rate cut, surprising many with a jumbo-sized 50-basis-point reduction. Additionally, the Fed’s updated forecast included up to two more cuts, totaling another 0.5% between now and the end of the year.

With this roadmap and Chair Jerome Powell’s stated desire to “recalibrate” policy as inflation cools, banks and credit unions must ask themselves these three questions to ensure they can continue operating smoothly moving forward.

1. Is your FP&A team ready?

As we move into Q4, some banks still lack formal financial planning and analysis (FP&A) functions. Others have an FP&A team, but the processes to execute those functions are decentralized, making gathering data laborious and time consuming. While 36% of finance function leaders say they update their FP&A forecasts weekly, recent bank collapses have happened in far less time than that, illustrating why weekly updates may no longer suffice: both Silicon Valley Bank and Signature Bank took less than a week each to reach their critical points.

Centralizing and streamlining FP&A operations now can also help a bank effectively manage costs and maintain profitability over the medium- and long-term. For example, the Fed’s September announcement included an updated “dot plot” with up to four rate cuts in 2025 and up to two more in 2026. If a bank is still using an outdated, decentralized system, it may still be working to update its forecasts to include the first rate cut now in October—significantly slowing the speed of its decision- making process and risking missed opportunities.

The rate cuts may also not be the only fast-moving economic change that banks should be preparing for. While it still appears that the U.S. is on track for a soft landing through the end of 2024, 2025 is still cloudy. Goldman Sachs is the most optimistic, seeing only a 15% chance of a recession over the next 12 months. However, the New York Fed’s model offers a 61.8% probability of a recession in the same timeframe. If a recession does hit, operational inefficiencies caused by outdated systems and complex workflows can slow down decision making and endanger a bank’s cash flow and profitability.

2. Are your teams still siloed?

The largest source of these operational inefficiencies is easy to identify, but hard to solve: siloed teams. If relevant teams such as FP&A, risk, credit, asset liability management and others all have individual files that must each be updated each time there is a change to a projection or a new item to consider, human error will inevitably creep in. Files may be updated at different times, or someone may be looking at a completely outdated version of the data. Even something as simple as a typo in one file can quickly grow into a larger issue.

Lacking a single, fully consolidated set of data can even hide problems in plain sight. For example, Silicon Valley Bank’s lack of diversification in its investments was a major contributor to its fall. While it’s no guarantee that having centralized data would have allowed the bank to address this issue before it snowballed, it certainly would have made spotting the issue easier.

Consolidating data not only improves communication between different teams, but also enables advanced analytics. In response to rate cuts, for example, a data set centralized from multiple sources can help teams quickly update their net interest margin or profitability projections and model different scenarios to which all stakeholders have access. This allows a bank to make data-driven decisions about pricing and risk management in real time—making it simple to adjust strategies on the fly as conditions change.

3. Is your lending strategy ready for a spring surge?

Speaking of long-term impacts, the upcoming rate cuts could spur increased lending activity, especially in the housing market. 70% of Americans also don’t think it’s realistic to buy a home this year, in part due to costs; unsurprisingly, the National Association of Realtors (NAR) projects that 2024’s sales of 4.1 M will only just surpass 2023’s low total of 4.09M.

However, the rate cuts indicate things are looking up, which means banks need to be prepared for increased activity. NAR expects a “busier spring season in 2025” at the very least, backed up by 39% of Americans thinking mortgage rates will fall in the next 12 months (up 10% in just a month). Savvy buyers are trading reduced competition now for better long-term rates later. Falling base rates could easily accelerate the recent decline in mortgage rates observed by Freddie Mac.

Reduced economic pressure from other corners may also make a new mortgage more feasible. As CNBC notes, high benchmark rates also make auto loans and credit cards more expensive for consumers to use. With pressure easing in those areas, consumers may find it easier to add a mortgage to monthly expenses.

Even if they don’t take on a mortgage or auto loan, currently “sluggish” discretionary spending could be on the rise. Credit and other lending teams aren’t the only ones who need to know, though. For example, FP&A will need to know how reduced card interest rates and potentially increased spending could affect the organization’s cash flow as a whole. By operating on the same information, these teams can then present the right data to leadership to make informed decisions on the overall loan portfolio and more.

Putting it all together: Proactivity creates success later

After years of economic turbulence, banks should no longer be caught off guard by uncertainty. The Fed’s rate cuts, however, present an opportunity for banks to proactively prepare operations.

With a focus on key areas such as FP&A, intercommunication between teams and lending, banks can set themselves up for success as the Fed continues adjusting rates.

More efficient operations now, driven by data centralization, can help maintain profitability and manage costs through the end of 2024, into 2025, and beyond.

Rishi Grover is Chief Solutions Architect at Vena Solutions.