Inflation and rate hikes ahead: Bankers cautious on the economy

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, April 14 (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 is leading to predictions that the U.S. Federal Reserve will hike interest rates 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. read more

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"Higher rates are typically a positive for banks," said Jason Ware, chief investment officer for Albion Financial Group, which holds JPMorgan (JPM.N) shares. "But if borrowers are unable to absorb higher borrowing costs it is an offsetting benefit. There could be a headwind if they rise too much."

Several banks started stockpiling cash to cushion potential loan losses if inflation bites. read more

While that showed some banks were getting more concerned about the macro environment, it was "not necessarily a prognostication we will hit bad economic times," Ware said.

U.S. monthly consumer prices increased by the most in 16-1/2 years in March to hit 8.5% year-on-year. read more

Mortgage rates meanwhile have been soaring, with the average interest rate on the most popular U.S. home loan rising to more than 5% last week, the highest level since November 2018. read more

"All of our clients are feeling the impact of the inflationary pressures across the board," Wells Fargo 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. Mortgage loans fell 33% from a year ago on lower originations and gains from home sales. read more

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's (JPM.N) Chief Executive Jamie Dimon on Wednesday warned of economic uncertainties, partly arising from soaring inflation. The bank also showed weaker mortgage lending, with loans down 3%.

Albion's Ware said, however, if inflation does come down and growth does normalize, the benchmark 10-year U.S. Treasury yield , which influences mortgage rates, could settle, which would be good for mortgage rates and borrowers.

CHANGING ECONOMIC LANDSCAPE

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

Dimon expects higher rates than the market is pricing in, currently 3% at the end of 2023, he said Wednesday. read more

"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 Fed's quantitative tightening, as it reverses its pandemic-induced bond buying bonanza, will be "more substantially important than other people think" because of the huge change in investment flows as people adjust their portfolios.

Goldman Sachs 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. read more

"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 (BLK.N) described how clients were grappling with the changing economic landscape and adjusting their fixed income portfolios. read more

"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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Reporting by Megan Davies, Elizabeth Dilts-Marshall and David Henry; Writing by Megan Davies; Editing by Alison Williams and Andrea Ricci

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