U.S. consumers turned out to be made of sterner stuff than experts had anticipated—much to the delight of economists, politicians and Wall Street alike—but Brian Moynihan is warning the Fed not to push the public too far.
Thus far, well-reported “resilient” consumers have managed to keep up their spending despite a combination of inflation and higher base rates, mitigating the much-anticipated slowdown of the economy.
But their cash can only go so far, warns Bank of America CEO Moynihan, who has alerted Fed chairman Jerome Powell not to “overshoot” on his policies to wrangle inflation back down to its 2% target.
Speaking to Bloomberg TV Tuesday, Moynihan—a favorite of Berkshire Hathaway CEO Warren Buffett—repeated points he had make previously that the public has been “remarkably resilient.”
“If we were sitting here last year our team was predicting a recession somewhere early this year. Then they took that off the table as you move through the year and now they’re predicting 2% plus growth for this quarter,” Moynihan said.
The second-largest banking institution in the U.S.—behind JPMorgan Chase—isn’t alone in positively reassessing its forecast. Just this week investment advisors Vanguard—which has $8 trillion in assets under management—updated its house forecast to strip a recession out of its baseline view.
The note from Joe Davis, Vanguard’s chief global economist, added it has raised its growth forecast for the U.S. from 0.5% to 2% and lowered its forecast for the year-end unemployment rate from 4.8% to 4%.
But, like fellow banking titan Jamie Dimon, Moynihan isn’t overly bullish on the good news.
“You’ve gone from negative to slightly positive 2%,” he continued. But that is “returning to the mean,” Moynihan pointed out.
“It’s not not outsized growth, it’s actually slowing down,” he added. “Meanwhile the consumer is very resilient and that’s providing an anchor to windward that the Fed has latitude that a lot of places don’t have.”
However, while the Fed can afford to be “restrictive” Moynihan wanted that Powell and his peers would have to be “mindful of the change.”
“At some point that consumer will slow down and they have slowed down their spending. Last year it had been 10% growth, in the fall 5% and now it’s down to 3% or 4%,” he continued.
Outside of Bank of America data this trend can also be seen. The Bureau of Economic Analysis found that in January 2024 the uptick in consumer spending—or personal consumption expenditures (PCE)—was just 0.2% compared to the month prior.
Looking on a year-to-year basis the downward trend is all the more obvious. In January 2023 PCE was up 7.9% compared to where it was a year ago, falling to 5.3% by June of that year. Come January 2024, spending growth compared to the same month a year prior had slumped to 4.5%.
The ‘point of pain’
Moynihan’s team has long warned about how far the Fed will push consumers with interest rates, which has stood at 5.5% since last summer.
But it was even earlier than this—in March 2023—that Bank of America economist Aditya Bhave warned in a note that consumers would be pushed to (and arguably now held at) their breaking point. In the same note, Bhave correctly predicted the continued hikes and holds the Fed would impose throughout that year.
“The Fed will have to keep raising rates until it finds the point of pain for consumer demand,” Bhave wrote in 2023. “At this stage, 25bp rate hikes in March and May look extremely likely. We recently changed our Fed forecast to include an additional 25bp hike in June. But the resilience of demand-driven inflation means the Fed might have to raise rates closer to 6% to get inflation back to target.”
And while Bhave previously felt—like most on Wall Street—that a recession was likely, he added: “Risks are skewed towards an extended period of consumer resilience, stickier inflation, and more Fed hikes. Either way, however, the lesson for investors is: No pain, no gain.”
