Wall Street Banking CEOs Express Recession Concerns Over Inflation, Asset Price Deflation

Wall Street Banking CEOs Express Recession Concerns Over Inflation, Asset Price Deflation
American flags fly outside the New York Stock exchange on Jan. 14, 2022. (Mary Altaffer/AP Photo)
Bryan Jung

Some of the biggest U.S. financial institutions on Wall Street are concerned about a worsening economic situation over the coming months, according to several top banking executives attending the Credit Suisse Financial Services Forum in Florida.

Reuters interviewed several key bank officials at the financial services forum on Feb. 17 about the economic situation in the year ahead.

The bankers are grappling with worsening market conditions, citing rising inflation, tighter credit, asset price depreciation, and the postponement of major company deals due to market uncertainty.

The banks are also taking into consideration anticipated multiple rate hikes by the Federal Reserve and the continuing tensions in Ukraine.

Several U.S. banks had reported mixed results in their fourth quarter earnings reports in January, after the Federal Reserve announced that it would scale back its asset purchases this year, causing markets to fall.

High inflation and expectations of more aggressive rate hikes from the Fed have whipsawed markets so far this year, sending the S&P 500 down 7 percent year-to-date while bond yields have jumped and the yield curve has flattened.

The Fed has indicated it likely will start raising interest rates in March, the first increase in more than three years.

James Bullard, president of the Federal Reserve Bank of St. Louis, repeated his call on Feb. 14 for the Fed to take the aggressive step of raising its benchmark short-term rate by a full percentage point by July 1.

“We’re at more risk now than we’ve been in a generation that this could get out of control,” Bullard said at a panel discussion at Columbia University.

Economists anticipate that the Fed will go for an additional five or six rate increases in 25 basis-point increments this year.

Chief Executive Brian Moynihan in the interview said that the Bank of America (BoA) views high inflation as a stress test on its portfolio, due to concerns that the Fed will be unable to control rising prices, which will lead the country into recession.

"What will hurt the industry generally will be if they have to create a recession," said Moynihan, "and that's not their goal for sure, they'll hopefully do a great job handling it ... we stress test that and we're fine."

He continued by saying BoA's capital markets business is down so far in the first quarter, but the bank continues to see a strong pipeline of customer activity.

Goldman Sachs Chief Executive David Solomon also said that trading and investment banking activity has slowed since the beginning of the year and that it continues to be healthy.

He agreed that rampant inflation would be a potential headwind to growth, as the economy heads into an environment of high inflation and a tightened money supply.

"Everybody is used to asset appreciation and we might have a period of time where there's less asset appreciation," he said.

However, Mike Santomassimo, chief financial officer at Wells Fargo & Co., views rising interest rates as helpful in the bank's ultimate goal to reach a 15 percent return on tangible equity.

He said that when interest rates are higher, banks make more money by taking advantage of the difference between the interest banks pay to customers and the interest they can earn by investing.

"The question will be where rates go and then what impact that has on the economy and the environment we’re in," Santomassimo said.

Companies are beginning to hold off on transactions due to "a lot of uncertainty in the marketplace over the past couple of weeks," according to Morgan Stanley's Chief Financial Officer Sharon Yeshaya.

"We have seen some of the pipelines, which are still healthy, being pushed out," and that "at this point, it doesn't feel like the first quarter of 2022 is going to be the same as the first quarter of 2021," she said.

Markets were rattled on Feb. 17 after President Biden again warned that the threat of Russia invading Ukraine is “very high,” and that an attack could come within “the next several days.”

Weekly jobless claims numbers came in at 248,000, rising from the previous week, while housing permits for January showed a surprising increase, but housing construction lagged behind expectations.

Stocks slumped at the end of trading on Feb. 17 upon news that Russia had not withdrawn its troops, as the Dow Jones Industrial Average shed about 622.24 points, or 1.8 percent, to 34,312.03, marking the blue-chip average’s worst daily performance of the year.

The S&P 500 dipped 2.1 percent to 4.380.26, while the Nasdaq Composite fell 2.9 percent to 13,716.72.

Bank shares declined with the S&P 500 banking index down 3 percent.

Reuters contributed to this report.
Bryan S. Jung is a native and resident of New York City with a background in politics and the legal industry. He graduated from Binghamton University.