Worcester Business Journal

F O C U S B A N K I N G & F I N A N C E BY LIVIA GERSHON Special to WBJ I n March of 2022, the U.S. Federal Reserve began bumping up its benchmark interest rate, which had hovered around zero for much of the previous 13 years. Over the next 18 months, it raised rates 11 times, up to 5.4%. For Central Massachusetts banks, that was a lot of change to deal with. But today, with the Fed seemingly poised to start bringing rates down this year, the banks are facing a new set of challenges. Martin Con- nors, president and CEO of Fitchburg-based Rollstone Bank & Trust, said the rap- id rate hikes meant the bank had to pay more to its savings customers, even though many of its loans were at fixed rates that couldn't be raised to compensate. "It's not the level," Connors said. "It's the manner in which it got there so quickly." e fast pace of change was a big issue, said Derek Plourde, president and CEO of Charles River Bank, based in Medway. Aer months of hesitating on responding to rising inflation with a rate hike, Plourde said, the Fed ended up having to move more quickly than it might have had it started earlier. "e reality is the Federal Reserve is always – and I don't want this to sound harsh – but they're usually being reactive and not proactive," Plourde said. "ey had to act much more robustly aer the fact." Fed Chair Jerome Powell said in early February he anticipates three rate reduc- tions this year, down to a probable rate of 4.6% by the end of the year. e first cut is expected to come in May. Local bankers say, just like with hikes, the dangers are less in the level of change than the pace of it. But, for now, projections suggest the cuts will come at a measured pace "In most cases people will tell you if they cut rates, that's a good thing," said Brian Stewart, executive vice president and CFO of Natick- based Middlesex Savings Bank. Big concerns in 2024 Stewart's biggest concern is the signals the Fed may send through its actions. e bond market is in an unusual state known as an inverted yield curve, in which interest rates are higher for short-term bonds than long-term ones. If the Fed's moves convince investors interest rates are likely to continue to fall, it could exacerbate this situation, reducing yields on long-term loans and investments. Overall, though, lower interest rates could attract borrowers who've put off personal or business investments waiting for a better deal, Connors said. e prime lending rate – offered to banks' most reliable customers – is tied directly to the Fed rate. If the Fed drops its benchmark to 4.75%, the prime rate would fall to 7.75%. "Psychologically, you're into the 7s, not 8s," Connors said. Still, customers will need time to ad- just to rates likely to remain higher than they had come to expect, he said. "It's going to take a long time to go back to what- ever normal is," Connors said. e Massachu- setts Bankers As- sociation expects both homebuyers and business owners to pick up borrowing activity in response to a rate cut, MBA President and CEO Kathleen Murphy said in an email to WBJ. "While rates will not decline in 2024 to the historically low levels we saw Martin Connors, CEO of Rollstone Bank & Trust Watching the FED Aer a jump in rates over the last two years, banks are preparing for cuts to trigger more activity Derek Plourde, CEO of Charles River Bank Kathleen Murphy, CEO of Mass. Bank- ers Association 14 Worcester Business Journal | February 19, 2024 | wbjournal.com

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