Kentucky bankers say they have reason to be optimistic about the state’s economy as better mortgage rates and bank profits are expected in the coming year.
Commonwealth bankers told The Lane Report they expect the Federal Reserve to follow up September’s half-percentage-point cut in the Fed’s lending rates to banks with further cuts this year and next.
“The current consensus is the Fed will lower its benchmark rate another 50 to 75 basis points by the end of the year, and an additional 100 basis points in 2025,” said Traditional Bank Chief Financial Officer Chas Sargent.
This makes it cheaper for businesses to borrow, to invest and create jobs. It also gives bankers better flexibility to manage the interest rate spread between what they charge for loans versus what they pay depositors.
“The community banking sector did a solid job of managing a very volatile and aggressive interest rate increase cycle; now we need to be just as mindful on the way down,” said Doug Lawson, president and chief operating officer for Field & Main Bank. “Overall, the industry will feel better, and it should relieve some cost-of-funding pressure and net interest margin compression that has been making profitability challenging.”
Lawson, who was among some 200 banking professionals who attended the Kentucky Bankers Association’s annual convention in late September, said the impacts of the Federal Reserve’s interest rate pivot was the topic of most conversations between sessions.
This is good news for the residential real estate market also, where a spike in financial system interest rates that began around three years ago has contributed to fewer homes available to buy with higher prices but fewer sales.
The benchmark that mortgage lenders peg their rates against is now considered likely to drop through 2025 and even beyond.
“Long-term mortgage rates dropped prior to the announcement of the 50-basis-point decrease (Sept. 18) and we expect mortgage rates to decline more if the Fed continues lowering the target short-term rate,” said Mark Gooch, chairman and CEO of Pikeville-based Community Trust Bank. “Long-term rates typically follow short-term rates, and lower long-term rates will make housing more affordable for many potential borrowers, particularly if rates continue to decline into 2026.”
An indication inflation is tamed
“Lower interest rates typically help the economy,” said Louis Prichard, Central Kentucky market president for Louisville-based Stock Yards Bank, the largest commonwealth-based bank. “Lower rates mean lower borrowing costs and also can reflect that the Fed has reached or is close to reaching its goal of reducing inflation.”
The short-term interest-rate adjustments the Fed is expected to make almost certainly will impact mortgage interest rates, Prichard said.
“The longer-term rates that impact mortgage rates,” he said, “would likely follow suit and to some…
Read More: Banking: Lower Interest Rates Lift Bankers’ Outlook – Lane Report
