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U.S. consumers turned out to be made of sterner stuff than experts had anticipated\u2014much to the delight of economists, politicians and Wall Street alike\u2014but Brian Moynihan is warning the Fed not to push the public too far. <\/p>\n
Thus far, well-reported \u201cresilient\u201d consumers<\/a> have managed to keep up their spending despite a combination of inflation<\/a> and higher base rates, mitigating the much-anticipated slowdown of the economy. <\/p>\n But their cash can only go so far<\/a>, warns Bank of America CEO Moynihan<\/a>, who has alerted Fed chairman Jerome Powell not to \u201covershoot\u201d on his policies to wrangle inflation back down to its 2% target. <\/p>\n Speaking to Bloomberg TV<\/a> Tuesday, Moynihan\u2014a favorite of Berkshire Hathaway CEO Warren Buffett<\/a>\u2014repeated points he had make previously that the public has been \u201cremarkably resilient.\u201d <\/p>\n \u201cIf 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\u2019re predicting 2% plus growth for this quarter,\u201d Moynihan said. <\/p>\n The second-largest banking institution in the U.S.\u2014behind JPMorgan Chase\u2014isn\u2019t alone in positively reassessing its forecast. Just this week investment advisors Vanguard\u2014which has $8 trillion in assets under management\u2014updated its house forecast to strip a recession out of its baseline view. <\/p>\n The note from Joe Davis,\u00a0Vanguard\u2019s\u00a0chief 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%.<\/p>\n But, like fellow banking titan Jamie Dimon<\/a>, Moynihan isn\u2019t overly bullish on the good news. <\/p>\n \u201cYou\u2019ve gone from negative to slightly positive 2%,\u201d he continued. But that is \u201creturning to the mean,\u201d Moynihan pointed out. <\/p>\n \u201cIt\u2019s not not outsized growth, it\u2019s actually slowing down,\u201d he added. \u201cMeanwhile the consumer is very resilient and that\u2019s providing an anchor to windward that the Fed has latitude that a lot of places don\u2019t have.\u201d<\/p>\n However, while the Fed can afford to be \u201crestrictive\u201d Moynihan wanted that Powell and his peers would have to be \u201cmindful of the change.\u201d<\/p>\n \u201cAt 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\u2019s down to 3% or 4%,\u201d he continued. <\/p>\n Outside of Bank of America<\/a> data this trend can also be seen. The Bureau of Economic Analysis found that in January 2024 the uptick in consumer spending\u2014or personal consumption expenditures (PCE)\u2014was just 0.2% compared to the month prior.<\/p>\n Looking on a year-to-year basis the downward trend is all the more obvious<\/a>. 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%. <\/p>\n Moynihan\u2019s team has long warned about how far the Fed will push consumers with interest rates, which has stood at 5.5% since last summer<\/a>. <\/p>\n But it was even earlier than this\u2014in March 2023\u2014that Bank of America<\/a>\u00a0economist Aditya Bhave warned in a note that consumers<\/a> 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. <\/p>\n \u201cThe Fed will have to keep\u00a0raising rates\u00a0until it finds the point of pain for consumer demand,\u201d Bhave wrote in 2023. \u201cAt this stage,\u00a025bp rate hikes in March and May\u00a0look extremely likely.\u00a0We\u00a0recently changed our Fed forecast to include an additional 25bp hike in June.\u00a0But the resilience of demand-driven inflation means the Fed might have to raise rates\u00a0closer\u00a0to\u00a06% to get inflation back to target.\u201d<\/p>\n And while Bhave previously felt\u2014like most on Wall Street\u2014that a recession was likely, he added: \u201cRisks are skewed towards an extended period of consumer resilience, stickier inflation, and more Fed hikes. Either way, however, the lesson for\u00a0investors\u00a0is: No pain, no gain.\u201d<\/p>\n<\/div>\nThe \u2018point of pain\u2019<\/h2>\n
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