U.S. consumer spending is seeing “weakening growth” but not a slowdown, Bank of America CEO Brian Moynihan said Friday.
Interest rate hikes by the Federal Reserve are starting to affect the housing and auto markets, and renters will see their budgets tighten as landlords pass on the rising costs, he said. he told CNBC’s “Squawk Box Europe.” But he pointed out that consumer spending remains strong.
“If you raise rates and slow the economy to fight inflation, you expect consumer spending to slow down. That hasn’t happened yet. So it could happen, but it hasn’t. still produced,” Moynihan said.
“You’re seeing an easing in the growth rate, not a slowdown. Not negative growth.”
Bank of America expects the Fed to hike rates by 75 basis points and 50 basis points in its two remaining meetings this year, followed by two increases of 25 basis points next year. One basis point equals 0.01%.
This will bring the funds rate to about 5% and the Fed can then “let it go,” Moynihan said.
The current rate of 3% to 3.25% is the highest since the start of 2008 and follows three increases of 75 basis points in an effort to combat inflation, which reached 8.2% on a annually in September.
Economists, politicians and business leaders are divided on whether the US economy is heading into a recession or is already in one. US gross domestic product rose for the first time this year in the third quarter, with annual growth of 2.6% higher than expected.
JPMorgan boss Jamie Dimon told CNBC he expects a recession in six to nine months given quantitative tightening and the unknown impact of Russia’s war in Ukraine.
But for now, consumers still have strong credit, unemployment is low, wage growth is strong, and businesses are in good shape with strong underlying credit — even as growth and earnings are slowing, a said Moynihan. However, he acknowledged there were risks of unforeseen events with “low probability and high impact”.
“You don’t see those risks manifesting in changing business and consumer behavior yet. People aren’t laying off people in droves, they’re not hiring as many people,” he said.
When asked if the corporate credit market was showing any warning signs, Moynihan said, “I wouldn’t confuse credit risk with pricing risk.”
“Growth and earnings could slow down, again because the economy has recovered very quickly and had significant growth that has flattened out a bit. If you see negative GDP prints, of course, corporate profits could slow,” he added.
“But on the other hand, they’re still making money, the margins are still holding…the underlying credit, the underlying credit structure, the underlying credit quality is very strong.”
Moynihan said Europe could experience a recession early to mid-next year before “going back to the other side”, with war in Ukraine and the risks of an energy crisis on the horizon.
“But right now you don’t see the conditions because employment is strong, the underlying activity is strong, the amount of stimulus that’s been put in place is still in the markets that people don’t see. like a deep recession.”
He added: “The issue of energy is very different from the United States. The good news is that the United States is a big economy, if we can bring the energy to Europe, for people to heat their homes and the industry is working, that would be a good thing. And I know that all the companies are working on it, because I talk to them about it.
Clarification: This article has been updated to clarify that Brian Moynihan was talking about consumer spending growth in the United States.