Name: Wells Fargo CEO: 'The Debate is Now Bigger than the Rate'
Uploaded: 2015-11-05
Duration: 7 min 57 s
Description: John Stumpf sits down with Fortune's Susie Gharib to discuss his take on the Fed raising interest rates.

So, it looks more and more like the Federal Reserve is finally gonna have its first interest rate hike in December. Is that what you're expecting? I really think this time it will happen. I think if they. I don't know what they're thinking. I only can read the Fed minutes, but I think if they could turn the clock back, they probably wish they would have done it in June. They probably wish they had done it in September. Today, the debate is bigger than the rate. And I think they want just to get on with it. And also, if you look at the next to zero Fed funds rate that we're at, and we've been at since the summer of 2009, or early 2009, the economy's at a very different place. We have almost at full employment. Auto's are booming. Commercial real estate is doing very well. Oil and gas prices are down so the American consumer is doing better. Consumer spending's doing better. That doesn't mean everyone's doing better. But to suggest that we're at the same place we were six, seven years ago is just, and I think to have some adjustment, some lift off But I think what's going to more important than the 20 if they do move 25 basis points. What's the language around that going to be? Because I think it would be a miss perception or misunderstanding to suggest that we're going to see like the last time we're Moving rates up, or they're moving rates up with a very equal stair stepping every Fed meeting. I don't think that's gonna happen. How is Wells Fargo preparing for this new cycle of rate hikes? Yeah, it's a great question. So we are what they call asset sensitive. So just a little tutorial on banking. We make about a half of our income in fees for services, like we service people's mortgages and we do a variety of things. And the other half we make what they call the Net Interest Margin. We lend money out at this rate and we take it at this rate and the difference is a spread. That's been compressed, so as interest rates rise Our loans will reprice faster than our deposits, and we'll have a widening of the margin, meaning that we're asset sensitive. So, most banks like ours have depressed margins today because rates have come down. What's happened is, as rates came down, we lowered the price of our loans and we dropped the price of our deposits. We got to the point where the deposits Hit the floor, and loans kept pricing down, so we compressed the margin. As rates go up, we'll see some of that margin returning to more normal margins. So, what are you doing, it's been a long time coming for these interest rate hikes. What are you doing to prepare for this cycle that we may be seeing more than one rate hike over the next couple of months. Yeah, what we're basically doing is doing what we're doing all the time. Making sure we manage our risk. Make sure we You know, acquire new customers, new deposits, make new loans. And as the rates come, if they do come, and reflect the strength of the economy, that is just an added benefit to us. You know, we've really gone through the tough times, like other banks have with lower rates. So it's really more of the same. It's just gonna be more profitable, what we're doing. So. As rates go up, this is gonna be a good thing for profits at Wells Fargo. Can you count on higher earnings because of higher rates? No question that higher rates would mean more profits, not only for us, but for anybody from the smallest community bank to the largest of, The Wall Street banks will see increasing margins. So yes, that will help the earnings, but we don't give guidance on earnings. So we've all the things that off set it too. We have expenses, and all the other things we're doing. But yes A rising rate environment is what I would call a tail wind for our industry. It returns margins more to normal kind of numbers. What about with mortgages? Here you are at Wells Fargo, the largest mortgage lender in the whole country. Do you think that there will be a slow down in people coming into the bank to get a mortgage? See that's a great question. The rates that the Fed is talking about raising, if they do, are short term rates. Those are the rates that banks borrow money from the Fed. Or short term loans are based on. Maybe a credit card loan, or a working capital line for a business Mortgages are typically long term. Loans, and that's a very different set of loan rates that affect that. Think of the ten- year treasury or the thirty- year bond or something like that. So, those two are really. Now there is some core relation there, but just because short term rates rise Does not necessarily mean that long term rates are gonna rise. And does not necessarily mean that mortgage rates are gonna rise much if anything at all. So, you're not expecting any kind of a serious slowdown in mortgage lending? No, there are three important things in the mortgage business, when you buy a home. What does the borrower make? What's the house cost? And what's the financing cost. Those are the three big variables. If you're under 40 years old you think a 4 or 5 % mortgage is normal. Let me tell you it's not. I got my first mortgage in 1976 at 8 1 / 2 %. I got my second mortgage in 1980 at 11 1 / 2 %. I was lucky to get the money. So, if rates move from three percent to three and a half or four, these are still fabulous rates compared to history. I don't think, I think there's gonna be much more important things than interest rates. Not for [ UNKNOWN ] that's a different story, but jobs and wage growth has much more to do with the housing Growth im the housing sector that does eat cost of interest. Let me ask you about deposits, because as rates go up, do you think that people will start taking some of their money out of your bank and putting it in places where they can get a higher interest rate? What's your concern about deposits? Yeah, it's a great question. It's called dis- intermediation, where, and I think that for us Virtually all of our deposits are, what I would call operating deposits. Checking accounts, that businesses live out of, or checking accounts that consumers use. We only have about less than three percent of our money in CDs which tends to be money that would move and be rate sensitive. There'll be some deposit disputer mediation But I think much less than what most industry experts are suggesting because where are you gonna put the money? So let's say interest rates go from zero to 25 basis points. That's a quarter of one percent. People are gonna rush and take their money and go, what are you gonna put it into? Tomorrow. I don't see it. I just don't see that that's going to happen. Now maybe if there's a series of eight or 10 increases, and you're at three percent going to four you'll start to see, but we adjust for that, and And will adjust and will pay more for our deposits over time. You know John, we've been talking about interest rates going up for a couple of years now. And, now that it really does happen, whether its a quarter point or a half a percent. What do you think the reaction is going to be in the markets and with consumers? Is there going to be a little bit of a surprise factor or not? You know, that's a great question. I don't think so. I think, sure, it's gonna make all the news cycles, but again, I think there's been so much discussion. Tell me anytime in the past where people have been focused so much, or there's been so much talk about interest rates. And 25 basis points. I mean it's like it's created this monster, but I don't think it's gonna be a big impact. In fact, it might be a stimulus to the economy. Consumer confidence is up. Small business confidence is up. And if interest rates rise, or raise for [ UNKNOWN ], it might say, oh, yeah the Fed agrees with us. Things are getting better. They're raising rates because the economy's starting to improve. I think it could be a stimulus. [ BLANK_AUDIO ]

Wells Fargo CEO: 'The Debate is Now Bigger than the Rate'

Finance

John Stumpf on the Fed raising interest rates.

John Stumpf sits down with Fortune's Susie Gharib to discuss his take on the Fed raising interest rates.