Don’t expect interest rate cuts anytime soon, says former Fed bank examiner

The U.S. Labor Department released its December CPI index on Jan. 11, which found inflation increased due to higher housing and energy prices. Overall prices rose 0.3% from November and 3.4% from the same time a year ago. That’s greater than the previous 0.1% monthly rise and the 3.1% annual inflation rate posted for November. 

“The Fed wants to get to that 2% target, and it looks like they’re not going to be able to get there this year,” said Williams, who is also a master lecturer in the finance department at Boston University’s Questrom School of Business. “The path of interest rate reduction is not going to be as quick as what was even anticipated just a month ago.” 

The Federal Reserve announced in its Dec. 13 meeting it would leave the benchmark overnight borrowing rate unchanged—the third straight pause since July—in a targeted range from 5.25% to 5.5%, which signaled possible cuts later this year. The Fed’s next meeting is slated for Jan. 30–31.

The Fed reported that 50% of the incremental increase in the CPI in December was due to shelter cost, which Williams identifies as a structural problem that is not transitory and that the agency will have to address. What does this mean for big banks in the U.S.? “They’re in the middle of this,” he said. For example, banks may be paying more to keep depositors’ money in their accounts. “As rates change, it impacts profitability,” Williams said.

The bellwether banks

JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup reported Q4 2023 and annual earnings on Jan. 12, and the results were mixed. Out of the four, JPMorgan fared the best with a record $49.6 billion in annual earnings. Bank of America’s net income in the fourth quarter was $3.1 billion, down more than 50% from the $7.1 billion the same time last year.

Wells Fargo reported net income of $3.45 billion for Q4, a slight increase from $3.16 billion the same time a year ago. But the bank warned that net interest income may fall 7% to 9% in 2024. And Citigroup’s revenue fell 3% in the quarter. 

Williams noted the banks are also paying for the collapses of Silicon Valley Bank and Signature Bank in March 2023. “There’s a special FDIC assessment in the billions of dollars, and each of the big banks are paying their percentage,” Williams said. “So that’s why you saw these losses as well.”

In the earnings reports, “the banks demonstrated that they tried to flush out all of the big losses that they had,” Williams explained. If banks need to increase revenue, they’re going to find ways to reduce costs, including reducing staffing, he said. 

A technology bet

On Citi’s earnings call, CEO Jane Fraser said the bank will eliminate 20,000 roles in a move that will save it as much as $2.5 billion. In September, Fraser initiated the biggest restructuring of Citi, which trimmed it down from 13 management layers to just eight. 

Citi is betting on tech to create growth in the long term. “In total, we invested over $12 billion in technology in 2023,” Citi CFO Mark Mason said on the earnings call. “Beyond transformation, our technology investments are also focused on digital innovation, new product development, client experience enhancements, and areas that support our infrastructure.” 

Citi is looking at technology as a means to reduce costs and headcount, Williams said. “A lot of focus is on AI right now,” he said. “How can you use AI, not just to reduce cost, but to find a new way to create new revenue?”

Citi created the new position of chief client officer, and promoted David Livingstone to the role. He previously served for almost five years as CEO of Citi’s activities in Europe, the Middle East and Africa.

 “One of the things he will do is be involved in AI,” Williams said. “You’re using alternative data, in alternative ways to seek new clients and products.” 

Sheryl Estrada
sheryl.estrada@fortune.com

Leaderboard

Rohit Bahety was promoted to CFO for Sodexo North America. Rohit succeeds Sébastien de Tramasure, who has been appointed group CFO. Bahety began his career with Sodexo in India in 2006, transitioning from Abbott Healthcare. Progressing within the finance function, he gained international experience in several CFO roles. In 2022, he moved to the U.S., serving as CFO for the Campus and Government divisions.

Jazelle Lopez was named CFO at Xenith Solutions and Xenith Management Group. Lopez joined Tri-Cor Industries (a wholly owned subsidiary of Xenith Solutions) in 2012 as the GL accountant, becoming accounting manager in three years. She left Xenith Solutions and worked for Aveshka as the director of finance before returning to take over as CFO. 

Big deal

A new analysis by S&P Global Market Intelligence finds that in 2023, bankruptcy filings by private equity- and venture capital-backed companies in the U.S. increased to 104. That is the highest annual total on record, according to the report. In addition, the overall bankruptcy rate for U.S. companies also rose to 642 filings last year, a 73% increase over the prior-year total of 372, according to S&P Global Market Intelligence. 

Going deeper

"Rubik’s Cube is still selling millions after 50 years. Here’s how the analog Gen X phenom is solving the digital shift to Gen Z—and beyond," a new Fortune article by Prarthana Prakash, delves into how the Cube has seen huge growth and success in its relatively long lifespan in the world of games, selling about 500 million units. This year it celebrates its 50th anniversary since architecture professor Erno Rubik discovered it. 

Overheard

"We have an increasing detachment of the political elite from the working class and the people that actually go to work every day and that, I see as the number one risk for our societies.”

—Oliver Bäte, CEO of Allianz, the German insurance giant, told CNBC during the World Economic Forum in Davos, Switzerland, on Tuesday what he considers the current global risks.