Interest rates projected to fall this year as inflation begins to calm
Finally, relief from painfully high interest rates is projected for 2024, reversing more than two years of successive increases focused on regulating inflation in the post-pandemic economy.
Inflation has cooled and the Federal Reserve Bank has dampened its enthusiasm for more increases; instead indicating that rates likely will begin dropping this year. That change should comfort consumers and businesses and alleviate earnings pressure in the banking sector.
The Fed raised rates at 11 of 12 policy meetings from March 2022 to last July. The benchmark federal-funds rate has since held at a range of 5.25% and 5.5%, a 22-year high.
Inflation peaked in June 2022 at 9.1% and tumbled to about 3%, where it has hovered since June, a rate close to the Fed’s target of 2%. December’s inflation rate will be reported on Thursday with the Consumer Price Index.
In two industry reports last week, banking analysts at Stephens Inc. touched on numerous issues, including regulation, loan growth, deposit costs/growth, merger-and-acquisition (M&A) activity and projections for net interest income and net interest margins.
Both bank management and investors indicated in a Stephens survey that they are optimistic about the upcoming year though investors soured on the potential 2024 earnings performance of Bank OZK, which was the bank most cited by investors — 12% of those surveyed — as underperforming this year for lenders with assets ranging from $20 billion to $100 billion. The Little Rock bank has assets of nearly $33 billion.
Both groups overall predicted two or three Fed rate cuts this year though investors are projecting more rate drops than are bankers. Rate declines are projected to begin by mid-year.
Investors noted they will focus on monitoring credit trends during the year and 81% expect the banking sector to outperform the overall stock market.
Bankers believe the biggest opportunities to drive shareholder value in 2024 are will flow from organic growth and M&A opportunities. However other notable topics included, 30% of Southeast bankers selected
efficiency initiatives, 19% of West Coast lenders selected balance sheet management and 14% of Northeast institutions cited preserving capital.
For 2024, investor have low expectations for core deposit growth in 2024 and a great majority (65%) predict deposit growth to be in the zero%-2% range. Stephens projects median loan growth across the nation of 4% though that bumps up to 6% for the Southeast region, which includes Arkansas’ banks. Commercial real estate lending, which has been a thorn for the past two years, remains the top problem bankers said they will encounter this year.
“We believe incremental deposit growth will be a limiting factor on loan growth with many management teams taking a ‘wait and see’ approach given continued uncertainty and competitive dynamics,” Stephens reported.
As high interest rates challenge banks early in the year, the Stephens analysts indicated earnings per share will decline by 9% in 2024 for U.S. banks. As rates decline, lenders could see per-share growth of 11% in 2025, the report said.
Mergers and acquisitions for the year? Look for more announcements about banks combining operations, Stephens predicts, citing an acceleration from the 97 industry mergers registered last year, which was a 36% fall from 2022 and 57% down from 2019, before the pandemic. Stephens projects mergers to double this year to about 200.
SUPPORT FOR STARTUPS
The Arkansas Small Business Technology and Development Center is hosting two events this month to encourage and strengthen startup businesses in the state.
Efforts begin with a Starting a Business session Wednesday, when Arkansans can learn more about business ownership to understand the process of starting a business and gaining insight on the entrepreneur lifestyle. Participants will get more insight on the effort required to start and grow a business.
The Startup Crash Course on Jan. 23 will provide details about pre-planning for a startup, how to develop a business plan and how to manage a business. The session will outline local resources available to entrepreneurs in the state to strengthen efforts to build a business plan for the entire entrepreneurial journey.
Details are available at asbtdc.org.
WORKFORCE SUPPORT FOR NEA
An economic development agency has landed a $500,000 grant as part of a federal program that targets areas where prime-age employment (workers aged 2554) is significantly lower than the national average.
The grant to the Alliance for Rural Impact (ARI) will help Phillips County close the employment gap with additional investments in training and workforce development. Funding is supplied through the U.S. Economic Development Administration’s $200 million economic-development initiative.
“Beginning in the summer of 2022, ARI began the concerted effort of forming a collaborative team in and around Phillips County … to address workforce challenges,” said Jamie R. Wright, co-founder and executive director of ARI. “The results of this work identified prevalent challenges within the region that restrain its ability to make progress. This award gives Phillips and the surrounding counties a real chance to move the needle.”
The grant supports local efforts to increase local coordination and planning activities to enhance jobs and economic-development projects.
“Economic development takes strong partners to be successful, and as we work to build up the physical infrastructure of Helena Harbor, partners like ARI are working to build our human infrastructure,” said John Edwards, general counsel and economic director of Helena Harbor & Phillips County Economic Development.
The Alliance for Rural Impact is a nonprofit organization serving rural communities across the Mississippi Delta and Mid-South.