To varying degrees, top banking CEOs are starting to worry about inflation — even if their own economists are advising them not to.
The chief executives at Bank of America, Wells Fargo and PNC Financial Services Group spoke at an industry conference this week about rising prices that have dampened an otherwise upbeat mood regarding the pace of the recovery from the COVID-19 pandemic.
U.S. GDP growth could top 7% this year, consumers are in better shape than was expected last year, and bank earnings could get a boost from the release of more loan loss reserves, the CEOs said. But there are nagging worries over how long the recent surge in prices will last.
“The fear that the markets have and all of us have is you won't know ‘til you see it, and then it’s maybe too late to stop it,” BofA CEO Brian Moynihan said Thursday at the Bernstein Strategic Decisions Conference, which was held virtually.
The consumer price index published by the U.S. Bureau of Labor Statistics increased 4.2% year-over-year in April, the highest increase since 2008. The personal consumption expenditures price index, which the Federal Reserve monitors, increased 3.6% in April from the same month last year.
Economists at PNC Financial Services Group, the fifth largest bank in the U.S. at $560 billion assets, expect the recent run-up in inflation to wane, but the Pittsburgh bank’s CEO Bill Demchak said Thursday that he personally disagrees with them.
“The economy is on fire,” Demchak said at the Bernstein conference. “The big question is, as we start printing higher inflation numbers, does that inflation stick, or is it transitory? Our economists say it’s going to be transitory. I’m worried about it.”
Rising inflation has been driven partly by sky-high used vehicle prices, as supply chains that were pinched by the pandemic have been slow to churn out new cars. Used car prices have increased 21% over the previous 12 months and were up by 10% in April alone, the highest monthly increase since the 1950s, according to the Bureau of Labor Statistics.
Experts say that once quirks in production lines are solved, the furious pace of rising prices could cool.
The American Bankers Association’s Economic Advisory Committee, which is made up of 17 economists at large U.S. banks, said Thursday they expect the U.S. economy to grow at a 7.2% rate this year, which would be the most robust expansion since World War II.
The group forecasts that the personal consumption measure of inflation will reach 3.1% this year before dropping back to 2.1% in 2022.
Inflationary pressures could force the Fed to raise short-term interest rates earlier than previously thought, Beata Caranci, chief economist at TD Bank Group and the ABA group’s current chair, said during a press conference Thursday. She pointed to the rapidly evolving pandemic-era economy, as well as lingering supply chain challenges, in explaining the recent spike in inflation.
Fed policymakers have signaled that they may hold off on gradual rate hikes until at least 2023. But if prices continue to surge, they may boost rates in 2022 to curb spending and price inflation, Caranci said.
“Inflation will not be below the long-run average in this business cycle,” she said.
Federal Reserve Chair Jerome Powell and the central bank’s policy committee have committed to keeping interest rates low for now, and are waiting for substantial signs that inflation will remain above the Fed’s 2% target before lifting rates to combat it.
Fed Gov. Lael Brainard
Still, there is hand-wringing among bank CEOs, who want to see signs that the price increases will start to slow soon.
“The expectation for inflation is whether Procter & Gamble thinks they can get away with increasing the price of soap again, because they got away with it last time,” Demchak said. “The more we see this trend and the longer it plays out, I’m worried it is no longer transitory and becomes an expected and realized issue for the economy.”
Wells Fargo CEO and President Charlie Scharf said at the Bernstein conference Wednesday that market participants "do have this concern in the back of their mind" that inflation could get away from the Fed, and that the central bank may have to move more aggressively to get prices under control.
But Scharf said that he believes the Fed is striking the right balance so far.
“We certainly have confidence in the Fed and the abilities that they have, and we’ve just got to make sure that the market stays in line with the Fed’s ability to manage this,” Scharf said.
Consumers surveyed by the Federal Reserve Bank of New York in April expected inflation to reach 3.4% in the year ahead, up from an expectation of 3.2% the month before and the highest level of anticipated inflation since 2013.
Moynihan said that he is monitoring inflation expectations, amid economic bright spots like hoteliers reporting full rooms and more auto rental agencies seeing cars driven off the lot.
“I'd watch it carefully. It's a real risk,” Moynihan said.
He also noted how quickly conditions have evolved, pointing out that market participants who are now worried about the risk of inflation were just a few years ago fretting about achieving economic growth of 2%-3%, and getting inflation above the Fed’s 2% target.
“It’s incredible that we’re talking about that risk,” Moynihan said. “I think we’ve got to keep it in perspective.”
