On Friday, Chairman Jay Powell all but promised the Fed would start cutting the overnight rate at the upcoming Federal Open Market Committee (FOMC) meeting in September. Obviously, the markets liked the prospect of cheaper money, and asset prices soared. It was a nice way to end a somewhat boring week.
Now, if you feel a sense of déjà vu, you aren’t alone. It feels as though we have been talking about potential rate cuts for an extremely long period of time (here, here, here and here… to name a few). So long, in fact, I wonder just how anticlimactic it will be when the Fed finally gets around to doing it.
After all, churches won’t ring their bells when it happens. There won’t be any fireworks. No 21-gun salutes. No tickertape parades. No marching bands. The world isn’t going to stop revolving. The sun will come up in the East the next day, and most people’s daily routine will be the same.
Perhaps the one exception will be the CFO’s office at banks across the country. They will be waiting with bated breath for confirmation that another bank has cut deposit rates. More specifically, that their direct competition has done so.
Trust me, no one wants to be the first to do this. Further, no one wants to be the last one either.
It kind of reminds me of the roller skating rink when I was a kid. We would skate around in circles for who knows how long, talking to our friends about who we were going to ask for “couples skate.” While everyone was very excited about this, we parted like the Red Sea when the first note of, say, “How Deep is Your Love” by the Bee Gees came over the loudspeakers.
The girls always went to the far wall, and we inevitably ended up under the DJ booth. There were only two genders back in those days, which made this division much easier. In any event, we wasted precious time saying things like “you go first” or “I’ll go if you go” until the older teenager spinning the tunes would say something like: “quit [wasting your time], and get over there. This song is half over and I’m not playing this again.”
Then, one of us would venture out first, and the rest would immediately follow on his heels, almost lemming like. It was all so predictable, as was the lameness of the conversation: “So, do you have an Atari?”
To be fair, one has a thin arsenal of experience on which to rely for witty repartee when one is 12.
Now, if you can envision this scene at the roller rink, you can imagine what will be happening in the banking system on September 19th and 20th (2024).
Who is going to be the first brave soul to cut what their bank is paying for deposits?
Almost as important is the amount by which they cut. Will it be the entire amount by which the Fed cut the overnight rate or some fraction thereof?
Inquiring minds want to know.
Historically, the money center banks are the first to proverbially skate across the rink. As soon as, say, JPMorgan takes the plunge, Bank of America and the rest of the big guys will follow suit. Almost in lockstep will be the super regionals, then the regionals and, finally, the community banks. Here and there, a few firms might misunderstand the order of things, but that is basically how it goes.
What’s more, it makes complete sense, and there is no reason why it won’t happen this way again.
After all, the money center firms are sitting on a mountain of cash. I mean literally trillions of dollars in deposits which they haven’t lent out. This money is either sitting at the Federal Reserve or sloshing around in the repo market (too nerdy to fully describe). As soon as the Fed cuts the overnight rate, there will be an immediate corresponding decrease in what they earn on those assets.
Let’s Put a Rate Cut Into Perspective
For instance, currently, the Federal Reserve is paying member banks 5.35% for idle balances they leave at the Fed. The formula has been the upper range of the overnight rate MINUS 0.15% for a very long time. So, if the Fed makes a 0.25% cut in September, the amount it pays banks for balances will shift to 5.10% the very next day.
There is no reading between the lines, parsing of sentences or need for mental gymnastics. That will happen. Period.
So, how long do you think it will take JPMorgan, et al, to cut deposit rates when it is making 0.25% less on its hoard of cash at the Federal Reserve? Unless the CFO intends to lower the company’s profitability, the answer is ‘not very long.’ Oh, I am not saying it will be immediate, and the bank won’t yell it from the mountaintop.
However, once that first shoe falls, and fall it must, the rest of them will. Trust me, Jamie Dimon and Jeremy Barnum (CEO and CFO at JPM) have already worked out a game plan and timetable for their first move. That’s right, the dominos are set up across the banking system, just waiting to fall.
All they need now is a push. Sort of like the one my friends gave me so I could be the first to ask Caroline S. to skate back in the day. Although I can’t remember the song for that “couples skate,” who could, I am going to create a brand-new memory and say it was “Forever in Blue Jeans” by Neil Diamond.
That way, the next time I hear the song will trigger a memory which I didn’t previously have but will now have moving forward. It will be sort of like déjà vu, but not exactly, just like all of these speeches by Jay Powell and the markets’ reactions to them.
Have a great weekend.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.