Betas for This Falling Rate Cycle Will be Different

The long-awaited Fed rate reduction cycle has begun, with expectations of falling portfolio rates and NIM relief. Curinos’ September Retail Deposit Analyzer and our reading of history, however, indicate that portfolio betas will be lower and slower this time relative to the last two falling rate cycles of the Great Financial Crisis and the pandemic, respectively. Why? Because this time financial institutions did a better job of managing portfolio rates on the way up, but they now have less room to bring them down aggressively.   

The 2022-2024 rising rate cycle reached similar rate peaks of 2004-2006, at just over 5%, and nearly double the 2016-2019 peaks of 2.50%. Total portfolio betas crested at 30% in the 2022-2024 cycle, higher than the 2016-2019 rising-rate total portfolio beta of 23%. But they were lower than the 2004-2006 beta of 51% because of significant differences in savings/MMDA betas – 49% in 2004-2006 compared with 26% in the other two cycles. Meanwhile, peak portfolio rates in the 2022-2024 rising rate environment reached 1.74% across all products – 4.44% for CDs and 1.50% for savings/MMDA – higher than in 2016-2019.​​ 

The takeaway? Pressure will persist on portfolio rates, and betas will be lower. That’s because of continuing high demand for the high rates paid on CDs as well as acquisition and remix up to much higher rates versus portfolio. Which means that those hoping for high betas on the way down may want to take a second look at the data.