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Key Insights from the Latest Fed Meeting and What They Mean for CFOs

By Dory Malouf
Director Value Engineering

The U.S. Federal Reserve decided to keep interest rates unchanged from 5.25%-5.5% during its June 12, 2024 meeting. This decision, like all decisions from a governing body overseeing monetary policy, has far-reaching implications for corporations and how they manage liquidity performance.

How We Got Here

For decades, monetary policy had been geared towards growth with historically low interest rates making money cheap and easily accessible. A consequence of this extended period of cheap money was artificially inflated assets across multiple sectors of the economy, including the consumer.

In March 2022, this all came to a rapid halt and we are starting to see the impacts of higher borrowing costs on the economy – but is it enough to start moving away from a period of tight monetary policy and usher in another era focused on growth? Most importantly, what does that mean for finance leaders and how can you position your organizations for performance in periods of uncertainty?

Data Tells the Story: Slow, but Steady Growth is Projected for the Global Economy

According to IMF projections, the global economy is expected to grow at a modest pace of around 3.1-3.2% in 2024 and 2025.  While these forecasts are nothing to brag about, they still represent positive economic expansion. As with the global economy, U.S. GDP is projected to grow by 2.6% in 2024, followed by a slower rate of 1.8% in 2025 as high borrowing costs and moderate consumer demand take effect.

Europe’s economic outlook indicates slow growth, with projections of 0.7% in 2024 and 1.5% in 2025. Leaders resolved to maintain economic resilience in a region susceptible to risk tied to geopolitical outcomes.

Global inflation is starting to wane

In most major economies, inflation is expected to return to central bank targets by the end of 2025. However, with 64 elections in 2024, there is notable uncertainty accompanying these forecasts.

Key Insights from the Latest Fed Meeting and What They Mean for CFOs Global headline inflation is projected to ease from 6.9% in 2023 to around 5-5.9% in 2024 and further down to 3.4-4.5% in 2025, helped by tight monetary policies and easing goods and energy price pressures.  Core inflation (excluding food and energy) is generally projected to decline more gradually.

 

The latest read on inflation for the U.S. is 3.3% (as of May) and the Fed forecast indicates that their 2% target will not be reached until March 2025.

Are We at Endgame?

The short answer is: It depends who you ask. While there are indications that consumer spending is starting to slow and of weakness in some sectors like retail, the economy remains strong overall and unemployment in the U.S. remains at historic lows. In fact, the May Jobs Report exceeded expectations with a healthy gain of 272,000 jobs vs. the expected 175,000.

A Closer Look at Points of Exposure: Commercial Real Estate

As we look deeper at the risks to the global economy, the most significant issue is the exposure of banks tied to the commercial real estate sector. A May 2024 FDIC study revealed that office space vacancy rates have soared to 16.9%, reaching historical highs, with some major US markets experiencing rates as high as 30%.

Such high vacancy rates raise serious concerns about the real value of these properties. This is critical for banks, as they might need to drastically mark to market the values of these assets on their balance sheets. For instance, on June 10th, 2024, Related Fund Management sold a prime office building in New York City at a 67% discount, underscoring the size of the potential impact.  Such significant markdowns could threaten to trigger a domino effect of bankruptcies and send shockwaves through the economy, possibly eclipsing the fallout seen in the 2008 residential real estate crisis.

How to Position for Resilience and Optimize Liquidity Performance

Corporations should adopt a multi-pronged approach to build resilience and withstand potential disruptions from monetary policy shifts or geopolitical turmoil. The following five strategies provide a framework that CFOs and finance leaders can build on to set their organizations up for success and guide them through periods of uncertainty:

  1. Centralized Liquidity View: Liquidity data is only as good as its sources and timeliness. It is critical to utilize a Liquidity Performance Platform that provides insights from internal systems as well as external systems in real-time and systematically. This ensures data integrity and reliability.
  2. Forecast Regularly to Optimize Access to Liquidity: Strengthen financial resilience by maintaining a strong balance sheet with ample liquidity and manageable debt levels to weather economic downturns or supply chain disruptions. Equally as important is continuous stress testing by implementing robust risk management practices and scenario planning.
  3. Boost Agility with Digitalization: Embrace digital transformation and automation to increase agility and efficiency. This investment will yield operational resilience by establishing data integrity, timeliness of insights, and most importantly the reliability of the projections and scenario implications.
  4. Embrace Technologies that Safeguard Data: Build technological resilience by strengthening cybersecurity measures and data protection protocols to safeguard critical systems and information. Keys to success in this area are cloud computing, AI, and advanced analytics that enhance decision-making and allow teams to better anticipate potential risks.
  5. Adopt a Cycle of Continuous Improvement. Cultivate organizational resilience by fostering a culture of adaptability, innovation, and continuous learning to respond swiftly to changing circumstances.

These strategies provide a comprehensive resilience framework and give leaders the tools to withstand shocks, adapt to changing conditions, and seize opportunities for long-term growth and success.

Please visit our website to learn more about how Kyriba Liquidity Performance Platform can help you connect, protect, forecast, and optimize your liquidity to build resilience and stay one step ahead of the market.
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