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Portfolio Management

Which Budget Scenario Will You Use Next Year?

Cynthia Roy
Dec 28, 2023

Best-Case, Worst-Case, Most Likely Case, or All of the Above

If you’re in the midst of building or have recently finalized your 2024 budget, you likely have a few remaining questions, doubts, and concerns.

There may even be some lingering memories of how last year’s budget was immediately challenged due to the unforeseen bank failures – and the not-as-recent yet unforgettable COVID-19 pandemic – which continued into the first quarter of 2023.

At the last Federal Open Market Committee (FOMC) meeting, the Fed decided to hold rates steady largely due to a tighter labor market. However, the same questions remain: Will we experience another increase in 2024? Will rates hold steady? Will we see a decrease later in 2024 or a combination of movement?

Conflicting Opinions

Rates could go down: The most recent indications on the CME Group’s FedWatch gauge point to a full percentage point of interest rate cuts by the end of 2024.1

Rates could hold steady: According to Philadelphia Federal Reserve President, Patrick Harker, the central bank can stop raising interest rates. As a voting member this year on the rate-setting Federal Open Market Committee, Harker’s words carry extra weight as policymakers contemplate their next step forward. Though his remarks align with what several other officials have said recently, they are perhaps the most explicit endorsement yet of a halt to rate hikes.2

Furthermore, inflation’s broad slowdown extended through October, will likely end the Federal Reserve’s historic interest-rate increases.3

Rates could go up: According to Federal Reserve Chair, Jerome Powell, the central bank's fight against inflation is too premature to declare victory, as the potential for additional rate hikes may be warranted.4

What do I believe? As JPMorgan Chase CEO, Jamie Dimon, said, "Prepare for possibilities and probabilities, not calling one course of action, since I’ve never seen anyone call it.”5

If you’ve been asked to create a best-case, worst-case, or most likely budget/strategy scenario for 2024, you are not alone. The annual budget that was easy to prepare at the low rate, the stagnant environment is now a multi-dimensional, infinite project.

Client Insights

To gain perspective on the budget expectations for 2024, I had enlightening conversations with Jack Henry™ clients including Controllers, Financial Analysts, and CFOs.

Similar to the rate expectations outlined above, projected financials for 2024 are all over the place.

In fact, some bank and credit union clients are still experiencing solid loan growth and holding onto relatively cheap deposits, which is great news. But as they described their success – including the new businesses and jobs moving into their areas – I couldn’t help but wonder whether that can be sustained.

As small businesses are faced with significantly increased expenses that quickly deplete consumer savings due to the persistent cost of housing and ongoing, yet not so transitionary, inflation ... is it maintainable?

Other clients expressed an anticipated mix of modest loan growth (more consumer than commercial), with deposits either rolling off and/or moving into higher-yielding accounts.

One CRE heavy financial institution even declared they’re purposely not pursuing any new business, which makes you wonder … is it because of default fear, credit tightening, or just a smart business decision considering the unknown future?

The one common observation that everyone mentioned was liquidity.

The common observation that no one mentioned was the geopolitical situation that is sitting on the edge of our thoughts. And while indications show our overall banking industry is strong and showing signs of resilience, uncertainty remains.

Based on these conversations, it’s apparent that one-and-done annual budgets are the least likely business strategy these days – which happens to correspond with other recent expressions.

JHA Economic Scenario Narrative November 2023: Sentiment about the economic outlook is mixed. Some respondents are optimistic about the current stable business conditions and hopeful of coming interest rate cuts and stronger demand, while others are worried about inflation, prolonged high-interest rates, and geopolitical tensions.

Per the OCC Semiannual Risk Perspective Spring 2023: Financial forecasting accuracy is critical to making strategic business decisions in order to analyze the impact of desired or unexpected change. Banks with more mature processes have started conducting forward-looking scenario analyses to better understand and measure climate-related financial risks. This work will be ongoing, as common challenges include a lack of sufficient data, modeling scenarios with extended time frames, and the resulting need to make many assumptions.

Furthermore, asset liability management practices, including liquidity and interest rate risk modeling, stress testing, and sensitivity analysis, are critical to financial institutions’ efforts to maintain sufficient access to cost-efficient sources of liquidity. A focus on ensuring operational readiness to access contingent liquidity sources is warranted in light of the degree and speed of deposit flight observed in early 2023.6

Strategic what-if modeling is more necessitating and dynamically complex than we’ve seen in decades. Other points to consider:

  • Expectations for future interest rates and yield curves are uncertain as the Board of Governors of the Federal Reserve System (Federal Reserve) weighs actions to combat inflation.
  • Inflationary cost increases are driving down profit margins and borrower repayment capabilities over a wide range of businesses.
  • The banking industry has signaled that delinquency and loss rates will continue to increase from their historically low levels.
  • CRE loan problems continue to be of serious concern, and delinquency rates continue to rise for credit cards and auto loans.
  • Consumers’ excess savings continue to be in focus as one of the main predictors of current- and near-future consumer demand. In fact, in July 2023, consumer savings dropped very dramatically. If consumer savings remain at the current annual level of $705B, excess savings are projected to be depleted by February 2024.

Unlock Your Potential

This is not the time to use a spreadsheet. There are simply too many variables that need to be considered and then reconsidered. This is the time to tool up by utilizing a comprehensive financial forecasting software solution that can incorporate multiple what-if scenarios and variable economic scenarios and can stress interest rate risk. This is the best-case scenario all throughout the year.

“Give me a one-handed economist. All my economists say 'on hand...', then 'but on the other’ ...”

― Harry Truman

Interested in learning more about our Financial Performance Suite (FPS)?

Contact a Jack Henry expert today to discuss solutions for financial forecasting, financial reporting, economic scenarios, and asset liability management (ALM).

[1] Jeff Cox. The market thinks the Fed is going to start cutting rates aggressively. Investors could be in for a letdown, CNBC, accessed December 21, 2023.

[2] Jeff Cox. Philadelphia Fed President Harker advocates holding interest rates ‘where they are,’ CNBC, accessed December 21, 2023.

[3] Nick Timiraos. Cooling Inflation Likely Ends Fed Rate Hikes, The Wall Street Journal, accessed December 21, 2023.

[4] Megan Henney. Fed's Powell warns of inflation 'head fakes,' signals more rate hikes are possible, Fox Business, accessed December 21, 2023.

[5] Jeff Cox. What do I believe? As Jamie Dimon said, "Prepare for possibilities and probabilities, not calling one course of action, since I’ve never seen anyone call it.”, CNBC, accessed December 21, 2023.

[6] Semiannual Risk Perspective, Office of the Comptroller of the Currency, accessed December 21, 2023.






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