Navigating an Uncertain Rate Environment

Sponsored content by BOK Financial Capital Markets, a WBA Gold Associate Member

By Kent Musbach, senior vice president, and Marc Gall, senior vice president and asset/liability strategist, BOK Financial Capital Markets

Originally predicted to be a year of falling rates, rate-cut expectations have since come down considerably and some analysts are even anticipating that the Federal Reserve could hike rates at some point in 2025. Meanwhile, most financial institutions have outsized risk exposure one way or another—but this can and should change. We believe that beginning to fix the institution’s balance sheet mismatch now makes sense versus waiting for the Fed.

Rather than asking which way certain rates will move and by how much—a question that’s impossible to answer at this point—decision-makers at your financial institution instead should be asking: What can we do now that will be most impactful regardless of what the rate environment brings? The answers lie in your institution’s loan portfolio and deposit strategies.

Have an ‘all-weather’ strategy for 2025

Given that many institutions have outsized exposure to interest rate changes, it’s crucial to address these risks early in the year. The first step is determining whether your institution is adequately positioned for the current rate environment. Many community banks have faced challenges due to the rapid rise in interest rates over the past few years and are still not fully prepared for this environment. As rates are not expected to fall dramatically in the near term, unless there is a severe economic slowdown, institutions in this position should reassess their deposit pricing strategies to ensure they are competitive yet profitable.

If your institution is well-positioned for the current rate environment, there is still work to be done. It’s time to reassess your institution’s balance sheet in light of the ongoing uncertainty, preparing for both upward and downward rate movements to mitigate risk and maximize returns. Remember that decisions made now can set the tone for the entire year, making early action essential.

Fortunately, your institution doesn’t have to recreate the wheel when approaching this “all-weather” strategy; rather it’s just a matter of optimizing what your institution is already doing. This includes:

• Maximizing loan yields: Institutions should focus on obtaining the highest possible yields on loan renewals without losing business. This involves securing better rates and terms and not giving away revenue unnecessarily.
• Determining the most optimal deposit pricing: Getting deposit pricing right early in the year is crucial for driving revenue and improving margins.
• Making strategic investments: Given the significant changes to the yield curve over the past few months, institutions must evaluate their options for deploying cash and reinvesting. Investing in securities with favorable yields and durations can help institutions manage their interest rate risk and improve overall returns.
• Staying informed of economic changes: The Fed’s focus on inflation and employment will play a crucial role in determining future rate movements. Decision-makers at your financial institution should stay informed about these trends and adjust their strategies accordingly. Similarly, it’s important to understand what drives consumer spending and government spending, as these factors can significantly impact the country’s economic outlook and influence the strategies that financial institutions should adopt.

Finally, although the uncertainty surrounding changes in presidential policies and resulting economic impacts may seem more pronounced this year, it’s important to keep in mind that your institution has handled uncertainty before. By focusing on balance sheet management, optimizing loan and deposit strategies, and staying adaptable to economic changes, institutions can position themselves for success in the coming year. This includes taking a proactive approach and leveraging the current rate environment to your advantage rather than merely reacting to the changes as they occur.

Kent Musbach is a senior vice president and Marc Gall is a senior vice president and asset/liability strategist for BOK Financial Capital Markets.

Contact BOK Financial Capital Markets at 866-440-6514 to discuss the latest economic outlook and tailored solutions. We can help guide a unique, well-conceived strategy that considers many variables and potential outcomes.

The opinions expressed herein reflect the judgment of the author(s) at this date, and are subject to change without notice. The information provided has been obtained from sources believed to be reliable, but not guaranteed. Forward‐looking statements contained herein are based on current expectations and the economy in general, and are not guarantees of future performance. Likewise, past performance is not a guarantee of future results.

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