Inflation and rate hikes ahead: Bankers cautious on the economy

© Reuters. FILE PHOTO: Charles Scharf, CEO, Wells Fargo speaks at the 2021 Milken Institute Global Conference in Beverly Hills, California, U.S. October 18, 2021. REUTERS/David Swanson/File Photo

NEW YORK (Reuters) – Wall Street’s major banks and asset managers were cautious about the economy as they detailed how both consumers and institutional clients were struggling to deal with sky-high inflation and looming rate hikes.

The big U.S. banks are reporting results at a time of surging inflation, which could lead the Fed to hike interest rates more aggressively this year.

While that can benefit big lenders by increasing what they earn from loans, rapid rate hikes could slow the economy and scupper a nascent recovery from the pandemic.

“All of our clients are feeling the impact of the inflationary pressures across the board,” Wells Fargo (NYSE:) Chief Financial Officer Mike Santomassimo told reporters on a call.

While Santomassimo said that inflation has not yet shown up as a risk for the bank’s credit portfolios, the bank said that higher interest rates would hurt mortgage volumes.

Lower income consumers are being the most impacted by rising energy and food prices, Wells’ CEO Charles Scharf said later on a conference call.

Scharf said that, while the bank would likely see an increase in credit losses from historical lows, “we should be a net beneficiary as we will also benefit from rising rates.”

JPMorgan Chase & Co (NYSE:)’s Chief Executive Jamie Dimon on Wednesday warned of economic uncertainties, partly arising from soaring inflation.

Many Wall Street analysts and investors believe the U.S. Fed Reserve has acted too slowly to combat high inflation and are now forecasting even more aggressive rate hikes as the central bank catches up.

On Wednesday Dimon said that he saw more rate hikes ahead than the market is pricing in, currently 3% at the end of 2023.

“Those are storm clouds on the horizon that may disappear, they may not,” said Dimon. “That’s a fact. And I’m quite conscious of that fact, and I do expect that alone will create volatility and concerns.”

Dimon said that the U.S. Federal Reserve’s quantitative tightening, as it reverses its pandemic-induced bond buying bonanza, will be “more substantially important than other people think because the huge change of flows of funds is going to create as people change their investment portfolio.”

Goldman Sachs (NYSE:) CEO David Solomon meanwhile said on the company’s earnings call that he was watching inflation, stress on the supply chain, commodity prices and how U.S. households were coping with rising costs.

“We’ve also seen an increased risk of stagflation and mixed signals on consumer confidence,” said Solomon. “These cross currents will certainly create ongoing complexity in the economic outlook.”

BlackRock Inc (NYSE:) described how clients were grappling with the changing economic landscape and adjusting their fixed income portfolios.

“Our clients are trying to understand the implications of the rapidly changing investment environment,” said Laurence D. Fink, chairman and chief executive, who pointed to Russia’s invasion of Ukraine as creating “a supply shock in commodities that is further increasing inflation.”

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