Two signal events occurred in the financial policy space this week. The big bank CEO hearings this week in the House Financial Services and Senate Banking Committees are becoming an annual event featuring both chieftains of banking and important consumers of other public policy issues. CEOs of seven major U.S. banks appeared before Congress and the Federal Reserve announced a third straight 75 basis point interest rate hike. Consumers, the engine of the current economic recovery, beware.
Consumers ultimately deal with the higher interest rates that raise the cost of credit, mortgages, and housing, as well as the big bank practices that eat at their wallets. While the Fed seeks to suppress the labor market, consumers be damned, the big banks price in profit and add to the pain.
In today’s update, we cover the Fed’s rate hike, the big bank hearings, and their damaging effects on consumers.
Good weekends all,
Fed Engineering a Slowdown
The Federal Reserve has finally decided it is time to engineer an economic slowdown to tame inflation. The central bank raised interest rates by 75 basis points for the third time in a row, a staggeringly aggressive policy path that will inflict serious pain on the economy. Powell acknowledged as much during his press conference following the rate hike announcement, “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.”
The pain is just beginning. The Federal Reserve’s latest Summary of Economic Projections laid out a series of forecasts for monetary policy and economic indicators that could signify serious slowdowns in the economy. It forecasts interest rates will rise to 4.4 percent by year-end, implying the central bank will raise interest rates by 75 and 50 basis points, respectively, at its last two FOMC meetings of the year. The SEP also suggested that rates will top out at 4.6 percent in 2023 before a series of cuts dropping rates to 3.9 in 2024, 2.9 in 2025, and 2.5 in the long run. Powell is apparently indifferent to putting millions out of work to bring down inflation. The Fed is projecting an increase in unemployment to 4.4 percent next year, a leap from today’s 3.7 percent.
Pace of Federal Funds Rate Hikes
Source: Bloomberg, Kathy Jones
While a recession is not a guarantee – economists are not known for their 100 percent forecasting accuracy – the implication is all the same: kneecap the labor market to reduce demand in the economy. The odds of the Fed overshooting and inducing a deep recession have grown dramatically with this move, but this is ultimately the logical endpoint of putting the fight against inflation entirely on the Fed’s shoulders.
Supply shocks and supply chain disruptions initially caused this bout of inflation. The way out was supply-side investments to increase production and improve supply chain allocation, but Congress and the White House decided the Fed was solely responsible for fighting inflation. As inflation dragged on, aggressive rate hikes became the only policy path the central bank could pursue. The result: a weakened economy following one of the most miraculous economic recoveries in American history, which is a brutal marring of the legacy of strong countercyclical fiscal and monetary policy that puts consumers in the crossfire.
Bank and Pony Show
Bookending the FOMC announcement, Congress hauled out CEOs of seven of the nation’s largest banks before the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs. The CEOs of U.S. Bancorp, PNC, JPMorgan Chase, Citigroup, Bank of America, Truist, and Wells Fargo testified on a variety of issues related to their banks’ financial activities and internal workplace culture.
On the House side, Democrats focused on consumer protection, access to homeownership and financial services, workplace culture, and restoring trust in the financial system. Meanwhile, Republicans focused on government spending and regulations and the threat of “woke capitalism.” Both sides of the aisle in the House conveyed concerns over each of the banks’ willingness to comply with international sanctions, the costs of inflation and a potential recession, and emerging financial risks due to cyber threats.
Crossing the Capitol, the Senate hearing displayed many of the same themes as the House hearing but with a greater focus on consumer protection. Chairman Sherrod Brown kicked off the hearing by telling the big banks that they would be under constant scrutiny from Congress and advocates: “It’s our job to hold [the big banks] accountable to their workers, to their customers, and to the American people.” Democrats honed in on how the big banks are still engaging in practices that hurt everyday Americans, and Republicans crowed about the free market pushing ever greater amounts of capital to burgeoning industries such as green energy instead of fossil fuels.
One of the most notable exchanges from both hearings came when Representative Carolyn Maloney, champion of the Overdraft Protection Act, asked if any of the banks on the panel that had not already done so would commit to eliminating overdraft fees by 2025. Maloney commended Bank of America and Citigroup for taking steps to reduce or eliminate overdraft fees. The Manhattan representative then turned to the rest of the panel and asked for a raise of hands of who would pledge to eradicate these predatory fees within the next few years. Not a single CEO raised their hand.
Big Bank CEOs Refuse to Raise Hand to Pledge to Cut Overdraft Fees by 2025
From left to right: Andy Cecere (U.S. Bancorp), William Demchak (PNC), Jamie Dimon (JPMorgan Chase), Jane Fraser (Citigroup), Thomas Moynihan (Bank of America), William Rogers (Truist), and Charles Scharf (Wells Fargo)
Source: House Committee on Financial Services, Office of Representative Carolyn Maloney
Senators Menendez and Warnock followed up on the line of questioning the next day in the Senate. The CEOs were more defensive about the matter, highlighting the non-overdraft accounts they provide. The Senators recognized these answers as dodges and re-emphasized the need for serious reforms to eliminate or reduce overdraft fees. The damning nonresponses highlighted that even when given the opportunity to score points with consumers, the largest banks are overly reliant and focused on profits to commit to relief for consumers.
While the average person was probably not tuned into Powell’s press conference or the Congressional hearings, they will still feel the profound impacts of both events. Inflation continues to ravage the pocketbooks of working families, but rising prices are finally starting to slow. The catch is that many families will be left without steady income streams to pay for stable costs. And the big banks showed no signs of slowing down predatory practices like overdraft fees beyond any recent reforms.
The Fed seems dead set on bringing down the labor market and immiserating working families to quell inflation, a policy that will push unemployment up and harm the economic recovery. Yet none of the daunting economic news inclined the big banks to curb some of their worst practices. The deafening silence regarding any commitments to end overdraft fees exemplifies that these banks are willing to extract any revenue from working families regardless of the economic situation.
Further Congressional oversight and legislation could help save consumers from Wall Street’s worst instincts to profit from an economic downturn. Hauling out the big bank CEOs before Congress should become an annual event to ensure there is regular oversight of the heads of our nation’s largest financial institutions. Due to the Federal Reserve’s policy and the inability of Congress to enact broader consumer financial protections, we are facing a mixture of higher borrowing and housing costs bearing on the consumer, the goose laying our golden egg of a recovery.