Low for long: the rate forecast hidden in bank technology budgets

The week

On August 27, 2020, Federal Reserve Chair Jerome Powell used the Kansas City Fed’s Jackson Hole symposium, held virtually that year, to announce a revised Statement on Longer-Run Goals and Monetary Policy Strategy. The Federal Open Market Committee said it would seek inflation that averages 2 percent over time. After periods of inflation below 2 percent, policy would aim for inflation moderately above 2 percent for some time. It also said decisions would be informed by shortfalls of employment from its maximum level, rather than deviations in either direction.

The policy rate was already near zero, where it had been since March. Markets and commentators read the change as a signal that rates would stay very low for an extended period, even if the economy recovered.

Monetary policy rarely appears in a technology steering committee’s papers. It should. Rates shape deposit behavior, funding costs and the value of the balance sheet, and through those they shape what a bank or credit union can afford to build and run. The August 2020 framework change mattered because it gave institutions an authoritative reason to expect years of near-zero rates. Many technology investment cases absorbed that expectation without stating it. We trace it through three places it hid: deposit and funding assumptions, the metrics used to judge digital channels, and the commercial terms of long technology contracts.

Deposit and funding assumptions

Deposits flooded into banks and credit unions in 2020 and 2021 as pandemic support payments arrived and spending fell. With rates near zero, those deposits cost almost nothing and looked sticky. Business cases for digital banking platforms, treasury management products and data programs often took both conditions as given.

The assumption shaped priorities as well as revenue lines. Tools for deposit pricing, intraday liquidity monitoring and interest rate risk analytics looked like low-value investments when rates were not moving. Asset-liability committees could run on monthly batch reports because little changed month to month. Institutions that deferred these capabilities later found themselves pricing deposits on spreadsheets while competitors and money market funds repriced weekly.

The hidden mechanism is that a business case measured against a flat rate path never tests the scenario in which the capability is most needed. A deposit pricing engine has little value at zero and large value at four percent. A case written in 2020 would have scored it on the first condition.

The same blind spot affected resilience spending. Liquidity stress tooling, the ability to see large depositor concentrations intraday, and the operational capacity to move collateral quickly all look like insurance in a calm market. Insurance is easy to cut from a budget that assumes calm will continue.

The metrics used to judge digital channels

Cheap funding also changed competition. Fintechs and digital-only banks could acquire customers on thin margins, supported by plentiful investor capital. Incumbents responded with digital account opening, mobile features and faster onboarding. Success was usually reported as accounts opened, application completion rates and time to fund.

Those metrics count arrivals. They say nothing about whether balances stay or what they cost to keep. When deposit costs rose, the same digital convenience that won accounts made balances easier to move. A customer could shift funds to a higher-yielding account with a few taps and no branch visit. A channel strategy measured on onboarding speed had no early warning for that.

A more durable scorecard pairs acquisition with retention and margin. Useful measures include balance retention at 90 and 365 days by acquisition channel, cost of funds by cohort, and the share of new relationships that add a second product. These are harder to compute because they join digital, core and finance data. That join is the work a rate-neutral business case should have funded.

The commercial terms of long contracts

The third hiding place was in contracts. Multi-year agreements for core processing, digital banking and cloud services were often priced on account or transaction volumes that reflected pandemic-era growth. Some carried minimum commitments sized to projected growth rather than current use.

Technology leaders in 2020 and 2021 had reason to lock in terms while budgets were relatively loose. The exposure lay in provisions that assumed the moment would last. Three deserve scrutiny in any long technology agreement:

• Volume floors and minimums, which create cost when activity falls or customers consolidate.
• Escalators tied to inflation indices, which looked trivial when inflation ran below two percent and became material in 2022.
• Termination and transition rights, which decide whether an institution can restructure its technology estate when its economics change.

Credit unions and community banks felt this most. Their margins depend heavily on the spread between loan yields and deposit costs, and much of their technology spend runs through a few long vendor relationships. A core or digital banking contract signed at the height of the deposit surge fixed costs for years, regardless of what happened to the spread.

None of this means the investments of 2020 and 2021 were mistakes. Many were overdue, and the pandemic made digital service essential. The gap was that their macroeconomic assumptions were implicit. Treasury teams stress-test the balance sheet against rate scenarios as a matter of routine. Few institutions applied that discipline to the technology portfolio, even though a case that only works at zero rates carries interest rate risk in disguise.

The remedy is modest. Attach a one-page assumptions note to every major technology investment. It should state the rate environment, deposit growth and account volumes the case relies on, and the conditions under which it must be revisited. Route the note to the asset-liability committee as well as the technology committee. That puts technology commitments in the same risk picture the board already reviews, at almost no cost.

With hindsight

Inflation rose sharply in 2021 and 2022. The Federal Reserve began raising rates in March 2022 and lifted the target range above 5 percent by mid-2023. Deposit costs climbed and balances moved to higher-yielding alternatives. The failure of Silicon Valley Bank in March 2023 showed, in extreme form, how unhedged rate exposure and fast-moving, digitally connected depositors could combine.

The 2020 framework itself did not last. After a review concluded in August 2025, the Fed dropped flexible average inflation targeting. That ended the idea of deliberately letting inflation run above 2 percent after periods below it, and it removed the emphasis on employment shortfalls. For bank technology leaders, the durable conclusion is that deposit analytics, liquidity monitoring and pricing tools are core capabilities in any rate environment. Technology business cases deserve the same rate scenarios the balance sheet gets.