As was widely expected in the markets, the FOMC cut the target range for the Federal Fund rate by 25 basis points to a range of 4.5% to 4.75%. Chair Powell reiterated sustained confidence that the economy remains on a path toward a long-term goal of 2% inflation despite a modest monthly uptick in the October CPE print. The committee also noted that, despite moving up modestly, the unemployment rate remains low. Mortgage rates have moved in the opposite direction since the last FOMC meeting driven by a steepening yield curve.
As we noted in our last Perspective, falling rates present an opportunity for banks. During the prolonged Fed plateau, between the last hike and the first cut, funding costs rose faster than asset yields, which squeezed net interest margin. Falling rates now present an opportunity to recoup some of that margin through proactive management of deposit rates. We noted, however, that this would be neither easy nor automatic. We also reiterate that this is an unprecedented rate cycle given the degree of regulatory, technological, behavioral and competitive change since the last time rates were this high in the mid-2000s. In short, this is a cycle wherein a higher-than-normal level of humility around crystal ball forecasting is warranted.
In that spirit, we’ll briefly recap what we observed in the data following the 50-basis point Fed cut in September. In consumer in particular, about half of financial institutions actually started lowering acquisition rates in July and August, ahead of the Fed. So for the purpose of our analysis, we’ll take those moves into account as well.
Consumer Deposits
As of the end of September, consumer acquisition betas, measuring since the peak in June, are at 34% for CDs and 28% for liquid savings. This has translated into portfolio betas of nearly 6% for CDs and over 9% for savings. These figures are much higher than what banks achieved at the start of the most recent falling rate cycle in 2019, but total portfolio costs in consumer remain flat. That’s because of an uptick in customer balances moving from checking into CDs. In short, some customers “woke up” at the last minute and moved to lock in some yield before it was too late – although it’s too early to say if this was a blip in the data or the start of a meaningful behavioral trend. In addition, acquisition is coming in at higher rates than the portfolio, adding to the upward pressure (Figure 1). All this underscores the complexity of bringing rates down quickly.
Figure 1:
Acquisition Rate by Product |
Jul ’24 – Sep ’24
Portfolio Rate by Product |
Jul ’24 – Sep ’24
Source(s): Curinos Consumer Deposit Analyzer. | Note(s): Simple Average Displayed, Overall Rates comprised of Checking, Savings/MMDA, and CD Deposits. Branch Banks only.
Commercial and Wealth Deposits
In commercial and wealth, the story for banks is a little better. Overall, these customers experienced higher levels of pass-through when rates were on the way up, and, in turn, many banks were able to pass through a higher percentage of cuts in short order on the way down. In commercial, many banks have achieved portfolio betas in the range of 50% for interest-bearing products. Because pass-throughs generally correlate with a starting rate position, banks with the highest portfolio costs at the peak of the last cycle have been the ones to cut most aggressively. When factoring in non-interest-bearing deposits, however, pass-throughs at the total commercial portfolio level average closer to 30%, and so far we haven’t seen a marked shift in balance behavior (Figure 2).
Figure 2: Commercial Deposit Beta | Aug ’24 – Sep ’24
Source: Curinos Commercial Deposit Analyzer
In wealth savings and money market savings, where exception pricing is most prevalent, betas were 45%. Still, nearly half the balances among the largest balances (>$10M) saw no pass-through at all as of the end of September. Overall, wealth portfolio betas were just under 30%. In addition to repricing existing balances, acquisition rates have moved down in line with the Fed, with only 7.5% of new balances priced over 500 bp, compared with 29% in July.
Consumer and Mortgage Lending
In the consumer and mortgage lending sectors, rate trajectories have shown divergent trends and overall application demand has remained lethargic. Rates on home equity lines of credit (HELOC) have declined, dropping by 55 bp in the two weeks following the Federal Reserve’s decision in September. In contrast, rates for mortgage and unsecured lending have increased, with first mortgage rates rising by 28 bp and unsecured or personal lending rates by 62 bp (Figure 3).
Figure 3: Consumer and Mortgage Rate Trends
Source: LendersBenchmark Unsecured Originations
Mortgage rates have been more closely tied to recent treasury-auction demand and the broader implications of recent inflation and labor market reports. Meanwhile, unsecured lending portfolios have begun to exhibit higher overall delinquency rates, which could be signaling potential future credit risk. Consideration of these trends is critical in shaping a lender’s overall lending strategy.
Looking Ahead
What’s unknown is how consumers will react to lower rates and how that behavior, coupled with funding needs, will drive competition for deposits. Ultimately, these factors will determine the degree to which banks are able to translate early progress in reducing funding costs into a sustained reduction. We’ll continue to watch the data and share our insights as this unprecedented cycle plays out.
