As the Federal Reserve starts to escalate its fight against inflation, bankers are worried about not only the disease but also the cure.
Big-bank executives who spoke at an industry conference this week expressed concern about inflation’s impact on their clients’ businesses, as well as about the potential for economic malaise if the Fed moves too quickly — or too slowly — to combat inflation.
Price increases have been stronger and more persistent than economists once expected, and while some bankers identified benefits for the industry or for their own companies, the more common sentiment at the Goldman Sachs U.S. Financial Services Conference was unease.
“Inflation is very, very real,” said Wells Fargo CEO Charlie Scharf, noting that prices for supplies across most industries are rising at the same time a tight job market pushes up companies’ wage costs.
Inflation will have an impact over the next year or so if it’s not addressed in the short term or medium term, Scharf said. He expressed hope that the Fed takes a “quicker path” toward reining in inflation.
“So I would say, we're more concerned about inflation than not. But there is a path forward,” Scharf said.
During much of the pandemic, the central bank has showered the U.S. economy with near-zero interest rates and $120 billion a month in bond purchases.
But the Fed has begun dialing back its bond-buying program and could accelerate that effort at its meeting next week. Many analysts say the Fed may decide to end its bond-buying program in March, rather than the original timeline of stopping bond purchases in June.
The faster timeline could open the door for the Fed to take the next step in tightening: raising short-term interest rates from near-zero levels.
“I do think interest rates are going higher,” said Chris Gorman, chairman and CEO of Cleveland-based KeyCorp, adding that higher rates will help tamp down inflation pressures. “But inflation is real, and we'll be dealing with that.”
A combination of cheap borrowing costs, massive fiscal stimulus and supply chain disruptions have helped push inflation to its highest levels since the early 1990s. The Consumer Price Index rose by 6.2% in October compared to a year earlier, with rising costs for food and housing suggesting that inflation is not isolated to a small number of items such as energy and automobiles.
Regions Financial President and CEO John Turner recalled a conversation he had with a restaurant chef who is paying higher prices for meat. Though the chef has held off on raising prices for customers, he may do so next year.
“There will be a — what I'll call a secondary effect or knock-on effect — in early 2022, with additional increases in prices,” Turner said. “Despite that, customers are still optimistic. They are still focused on growing their businesses, and I think that's positive.”
Inflation was one of the risks that bankers discussed at a meeting last week of a Fed-convened advisory council, Bank of America CEO Brian Moynihan said at the conference.
BofA has been stress testing its balance sheet for the past few quarters to gauge the impact of scenarios in which rising prices persist, Moynihan said. Under the tests done so far, there have been few issues, he noted.
But Moynihan also cautioned against the Fed moving too quickly with rate hikes, saying that he hopes the Fed can engineer a “soft landing” where it controls inflation without igniting a recession.
“The Fed has the tools to deal with inflation,” Moynihan said. “But if they have to apply them too aggressively, central banks and the Fed, it doesn't feel so good, and that's why we're testing.”
Fifth Third Bancorp Chief Financial Officer James Leonard expressed a more upbeat view, saying that banks should be “pretty solid beneficiaries” from the Fed’s push to fight inflation.
Higher interest rates will benefit banks when their assets reprice upward, and controlling inflation will also “take stagflation off the table,” Leonard said, alluding to a scenario where prices spiral out of control and the economy stagnates.
“Some movement up in the short end will be productive for us,” Leonard said. “I think the Fed will manage through, you know, so that there's not too much inflation going forward and they'll manage through the scenario. I think that will give a productive outcome to the banking sector.”
Some banks’ business models have yielded substantial benefits from inflation. For example, the card-focused American Express has been deriving 80% of its revenue from consumer and business card spending, plus annual fees, according to Chief Financial Officer Jeff Campbell, and relatively little from interest income.
“With that business model, with lending a very modest part of our overall business, a little bit of inflation is actually a positive thing for our business because of the way it drives greater spending without having an equivalent effect on our overall cost structure,” he said.
Skyrocketing car prices have been a boon for Ally Financial, one of the country’s largest auto lenders. Ally’s auto finance division saw its net financing revenues rise to roughly $1.3 billion in the third quarter, up by $227 million from a year earlier.
Supply chain shortages have hampered automakers’ ability to produce new cars, raising prices for new and used autos sharply just as more customers have been looking to buy cars. Prices for used cars and trucks were up a whopping 26.4% in October compared with a year earlier, according to data from the Bureau of Labor Statistics.
Though the supply chain pressures have eased, auto inventories are “still extremely, extremely tight,” Ally CEO Jeffrey Brown said. Dealers have pre-sold new cars for the next few months, and the lack of available inventory should be “very supportive” of auto prices for some time to come.
“We think things are going to be tight for a while,” Brown said.
Jon Prior, Kate Fitzgerald, Laura Alix and Allissa Kline contributed to this report.
