What a difference a year makes!

Things can certainly change over the course of a year. The interest rate environment is completely different than it was at the beginning of the year. You may remember that last January, the Fed Funds rate was 0 to 0.25 percent compared to today’s 3.75 to 4.0 percent; the one-year treasury bond was 0.4 percent compared to today’s 4.78 percent, and the 10-year was 1.63 percent compared to today’s 4.14 percent.

And what an impact those rates have made! The once-robust mortgage market has completely dried up; revenue from wealth management services have declined as smaller portfolios are not generating the fees they did a year ago. After years of dealing with excess liquidity, banks are now searching for money to fund loans. Wholesale funds are harder to get as some sources have rules preventing the extension of credit if unrealized losses in the bond portfolio exceed the bank’s equity capital. Other banks simply won’t make new loans if they have to pay market rates to attract new deposits.

Inflation, in my opinion, is the story of the year. Inflation is the reason the Fed raised rates 75 basis points for the fourth time this year on Nov. 2 (the sixth raise this year overall). The Fed is clearly committed to the notion that it’s worth breaking the economy in order to save it. Everyone is feeling the impact with the cost of housing, transportation, food and just about everything else rising dramatically. Of course, we brought this upon ourselves, pumping trillions of dollars into the economy during the pandemic, which was a period of substantially reduced productivity. We are feeling the result of the classic definition of inflation: Too much money chasing too few goods.

All this sets the stage for next year. Perhaps we already got a glimpse into the future on Nov. 8. The mid-term election results were certainly driven, at least in part, by voters’ reaction to the economy. There is hope that the worst of the inflation cycle is behind us, but uncertainty remains the byword of the coming year. Bankers I listen to are hunkering down, reviewing their budgets and focusing on their strengths. The headwinds are real and there is just no way of knowing whether they will pick up or fall off anytime soon. 

So this is a time to affirm your priorities, set realistic expectations for the coming year, and focus on serving your customers who are going to need you as much as you need them.