Rate Increases Yield Results
The leaders of the biggest banks have shifted to a “higher for longer” mindset, anticipating continued high interest rates this year.
JPMorgan Chase & Co., Citigroup and Wells Fargo & Co. all released their first quarter earnings on April 14; Bank of America Corp. followed on April 18. Considering the uncertainty in the atmosphere, it was a stellar quarter for those banks — particularly JPMorgan Chase.
“JPM looks like the standout winner from Friday. Excellent results, improved outlook, fortress-like [balance sheet],” wrote Piper Sandler Managing Director R. Scott Siefers on April 16. But he also explained that these banks were tempering their forecasts for loan growth due to continued high rates and recession fears.
JPMorgan CEO and Chairman Jamie Dimon said last week that he sees pressure in the commercial real estate space due to rising interest rates, particularly for clients with floating rate loans or those due to refinance.
As reality takes hold, U.S. businesses will be forced to adjust to a higher rate environment. But it wasn’t so long ago that economic luminaries were warning against the long-term impacts of secular stagnation, characterized by low interest rates and sluggish growth. Over roughly two decades, rates have been super low, and the Federal Reserve’s federal funds rate largely hovered just above zero following the global financial crisis.
Former Treasury Secretary Lawrence Summers, once a stagnation adherent, now believes we’re in a new age. He expects higher rates to continue as the Fed settles in for a long fight against inflation. This isn’t just driven by pandemic-era stimulus; he says we’ll continue to see more spending and less saving as baby boomers retire, and economies invest in green technologies to combat climate change.
“The world we knew,” Summers told NPR’s Planet Money this week, “is unlikely to come back.”
But has Summers factored in the credit environment?
Citi’s CEO Jane Fraser expects a “shallow” recession later this year. “That could be exacerbated in depth and duration in a more severe credit crunch,” she said in last week’s earnings call.
A small recession could deliver the cooling effect that the Fed so badly desires. Treasury Secretary Janet Yellen recently told CNN’s Fareed Zakaria that a decline in lending activity could curtail the need for further rate increases.
“Banks are likely to become somewhat more cautious in this environment. We already saw some tightening of lending standards in the banking system,” Yellen said. “[T]hat could be a substitute for further … interest rate hikes that the Fed needs to make.”
• Emily McCormick, vice president of editorial & research for Bank Director