In today's uncertain economic landscape, preparing for changes in the current rate environment is crucial for businesses and individuals alike. As your trusted community bank, we're here to shed light on the latest economic indicators and their potential impact on your financial decisions.
In January, the Consumer Price Index saw its largest increase since August 2023 and inflation eased to, but remains above the Fed’s 2% target. These metrics suggest the Federal Reserve will continue to prioritize controlling inflation and monitoring the overall health of the economy before making any changes. As such, following the March FOMC meeting, the Fed stated that they are holding at the current rate and will evaluate adjustments in future meetings.
The Fed’s official release stated, “Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.”
At a recent UCSB Economic Forecast Project (EFP) event, both Dr. Peter Rupert, UCSB Economist and Executive Director of EFP, and Dan Walters, a political columnist who has worked with the Sacramento Bee and is a current syndicated columnist for CalMatters, also discussed the impacts of inflation, and other economic metrics, including rate adjustments, that historically precede presidential administration shifts, while also reflecting on the current rate environment.
During the EFP presentation, both Rupert and Walters discussed factors they believe led to the actions of the new presidential administration, including a rise in homelessness, food prices, energy costs, and the housing crisis. These various data points all indicate a shift in economic pressures placed on government decisions, which ultimately impacts the rate environment that community banks and local businesses operate in. Highlights from the EFP event include:
Housing Costs may be considered the primary economic driver affecting California residents. With the cost of comparable homes in states like Texas, Arizona, and Florida around $250,000, they are significantly more affordable than California properties. This price differential is causing residents to relocate to more affordable communities outside of California. Dan Walters stated that the 41.5% increase in housing and energy costs over a four-year period is also contributing to increased costs and economic pressure for consumers and businesses.
Dr. Rupert reiterated his position that a recession is unlikely, and rate increases over the last several years prevented larger increases in inflation, further helping avoid a recession. In the banking sector, a “higher for longer” interest rate environment initially reduced demand for loans, while increasing pressure on banks to increase deposit rates or lose deposits to investments in US treasuries, or to fund managers offering higher money market yields. This shift in a bank’s balance sheet factors directly into its decisions to increase or reduce rates paid on deposit accounts, or on rates and terms offered on loans. Various factors have to be considered, including the cost to fund loans and the amount of liquidity available to lend.
These factors may also have resulted in banks tightening their credit standards. The Fed’s recent practice of quantitative tightening also removed liquidity from the economy, potentially slowing loan growth. Loan demand had also been hampered in the last few years by a rapid rise in interest rates by the Fed, following a period of historically low rates. In addition, businesses that accumulated cash balances through 2022 were more likely to rely on their internal funds, also contributing to reduced demand for bank loans.
Now, after over a decade of historically low rates, many borrowers have started to adjust their expectation on rates. As a result, banks are beginning to see an increase in demand for loans as clients look to take advantage of the decreased rates associated with the Fed’s reduction of 100 bps during 2024. At the recent Radius Real Estate and Economic Forecast event held at the Hilton Beachfront Resort on March 12, 2025, Dr. Christoper Thornberg, founding partner of Beacon Economics and keynote speaker for the event, noted, “Banking is returning to normalcy. Deposits are starting to grow, and loans are picking up.”
Are you looking for your next loan to fund a new opportunity? Consider banking locally and contribute to economic development in your community! Community banks are an important part of local economies, providing financial services to local businesses and residents. In addition, community banks know their clients and their communities and are in a unique position to help their clients understand the risks and work together to grow local communities in this current and changing economy. You can reach a member of our commercial lending team at americanriviera.bank.
