Bank of America CEO details mild recession outlook, Fed rate cuts, and more

Bank of America CEO Brian Moynihan joins Yahoo Finance Live from the 2023 World Economic Forum in Davos, Switzerland, to discuss recessionary pressures, inflation, the unemployment rate, the state of the consumer, and the outlook for the Fed.

Video Transcript

BRIAN MOYNIHAN: So our team, [INAUDIBLE] partner research team, have moved their recession look out a little later in this year into early next year. That means that they actually have a positive number for GDP growth in the US this year, slightly positive. And it'll be a mild recession, largely because the stimulus and other things, even though the Fed's raised rates, you see the capacity of the American consumer to keep going.

And so they're basically-- mild recession early next year. But over the last year, that's been constantly pushed out. And so we'll see what happens. But mild recession, slightly down for a couple of quarters, and then back to slightly up, and then more normal in '24 and into '25.

BRIAN SOZZI: How much pressure is the US consumer under right now?

BRIAN MOYNIHAN: Well, it's an interesting thing because it's sort of a tale of two cities. In the one hand, our customers spend $4 trillion a year. That spending dollar volume grew in the fourth quarter of '22 by about 5%. And first quarter '22 over first quarter '20 grew 14%. So you can see the impact of them slowing down. Now it's up dramatically from '19, like, 25%, 30%, or even more. So if you think about that, they're spending well. The first part of this, January, the 1st 10 days or so, they're up about 6% or 7%.

So a little bit fell over because of delays in travel. So they're spending nicely. The money in their accounts continues to be solid. It's coming down slightly. They're spending down some of the excess stimulus and excess savings. But they're all employed. And I think people forget is the United States employment picture is still pretty strong, and the Fed needs that to get a little worse to have that services side inflation come back in line.

BRIAN SOZZI: Within the context of this mild recession call by your team, what happens to unemployment? Where do you see that unemployment rate go?

BRIAN MOYNIHAN: So there are three or four core components. Unemployment gets to 5%, a little bit 5% plus, as we move into the latter part of this year into next year and sort of stays there and comes down, beginning the end of '24. Without unemployment-- I always ask our economists, how can you have an unemployment-less recession? How can you actually have 2/3 of the American economy driven by consumers if they're working, getting paid, and wages continue to rise? How can we have a recession? And they can give me a lot of explanations.

But the reality is, the manufacturing side is slowing down. Some of the consumer activity is slowing down. But unless we see unemployment move up, I think it's hard to square that with the recession. And that's what's going on. So our unemployment is to move up to 5%, or else, they really wouldn't be able to predict a recession.

BRIAN SOZZI: Would this be a mild recession within lower income consumers? I look at a lot of things that consumers are feeling right now on the lower end. Inflation-- it's come down. It's slowed, but it's still very high average. Those higher end consumers appear to still be out there spending aggressively.

BRIAN MOYNIHAN: Look, the problem with inflation, why you got to cut it off, is it hits the people who can least afford it because food prices mean the same-- people don't eat a lot more. So what happens is think about the percentage spent on that gas prices, same thing. So that's the thing that people have to be careful about. And when people say, well, if they fight inflation, rates go up. Somebody can't buy a new car that's an affluent.

That's not really what's they're after. They have to make sure that inflation comes down so the core wage growth, the American median income household will exceed the expense growth. And therefore, they can cash flow positive. And if you look across multiple years, they're still OK, but in more recent times, real wage growth has fallen back, and that's caused some of that slowdown by the consumer.

BRIAN SOZZI: And speaking of slowdown, the Fed in their very-- in their interest rate hikes have also really impacted the housing market in this country, really slowed down that market. How long do you see this downturn playing out?

BRIAN MOYNIHAN: Well, the reality is you're going along after the financial crisis and the recovery, sort of a normal long-term growth rate. Then you spiked up in the pandemic because there was a demand created, low interest rates, plus people wanting-- doing different kinds of housing thought processes. And that's coming down. And so the Fed raises rates to get to the things that are rate sensitive-- housing, cars, corporate debt borrowing. That's what they need to do to slow down the economy. That is their job-- get inflation under control. And so we'll see it tip down.

But frankly, it's not the issue because it's not overlent and overborrowed as it was before the financial crisis. Just the structure, our LTV and our mortgage portfolio, which is $200 billion, is in the mid 50s or something like that, so even refresh. So it's not-- the banking system is in good shape. And so it's just different this time than that time. On the other hand, they have to slow down the housing appreciation because that wealth effect lends people to start borrowing that money and doing things. And they've done that.

BRIAN SOZZI: I'll call you this. You are the, I would say, the wartime CEO of 2010 at Bank of America. Those times were-- and they were absolutely terrifying. The whole market slowed. The stock market slowed. Is what the Fed is now doing at rates, unwinding that liquidity, are they sowing the seeds for something like that again?

BRIAN MOYNIHAN: I don't think so because the transparency of the Fed, going back to Jackson Hole and Chairman Bernanke saying, we're going to tell you what we're going to do and the dot plots and all this stuff, they're signaling in the market. Sometime the market takes them on saying, you know, you're not going to raise rates as much. We have rates going up 5, 5 and 1/4. The market's sort of saying maybe not, those types of things. But I think the transparency, I think the care, I think the amount of data-- honestly, people forget how much data is there. You know, and they're getting it real-time, and so they have a better sense.

But it's tough to get the services side inflation down, and that's what they're focused on. So if people are looking indicators, they're looking for new claims for unemployment. Still very low, as low as they were in history, almost now. And job creation still slowing down, but still pretty strong. So I think those are the indicators looking at, but the real-time nature of this, I think, allows them to see a little bit further the impact of their activities.

And we're all feeding them data about the markets activity and stuff that wasn't transparent before, where the peas are under the mattress, so to speak, in terms of risk. When something goes down, instantaneously, we could all tell them what the exposure is to one of these name things that has a problem. So I think it's just different. Now, is it perfect? We'll find out. But I think they do a pretty good job. We do a pretty good job managing these companies. My peers and colleagues around the world take it very seriously to maintain the stability and the capability of the bank institutions. And the regulators and central banks have taken the same approach.

BRIAN SOZZI: Equity markets have stabilized a bit, to kick off this year, and in large part, because of this expectation, I think, if we get rate cuts at some point this year. Do you think that happens at some point in the back half of the year?

BRIAN MOYNIHAN: Our equity market strategist, Savita Subramaniam, has basically the equity market flat for the year. Now within that, she's saying there's great opportunities in different sectors. But in part, you know, she said that last week, and then she sort of was confronted when the market actually moved up to match her year end thing. So she sort of said, you have to think about this. And so that's not an exact 4,000 number, but it's a number that gives you an indication that the feeling is as a recessionary environment's there, as corporate debt gets more expensive, as the labor market softens, the idea of earnings growth for companies, that's one of the challenges. And so I think that's all going to wash through the system.

But does the Fed need to lower rates this year? We're still thinking, and I think people have to listen to them. They may lead this higher for longer just to make sure they squeeze out that services side inflation and just as a slower burn on that.

BRIAN SOZZI: The theme here at the World Economic Forum is a cooperation in a fragmented world. Now you met with the administration. You were in that room with a lot of your fellow CEOs. How fragmented is the world from a business perspective?

BRIAN MOYNIHAN: Well, I think there's-- the challenges with the administration yesterday, bipartisan here to engage with the business community, by the way, leaders around the world here to engage with the business community, that's the unique thing, what Davos has, is, you can walk down the street and see people from administrations around the world. You can see business people around the world. You can see advocates of all different types around the world. So that's the value.

And so I think the issue is trade. And the issue is the free trade and the globalization, the supply chain globalization, things that provide a great benefit to the world's citizens called into question. But it's a little bit more about resiliency, supply chain than people think. And so people have learned a lesson about single source supply at the lowest possible cost. Maybe it needs to be multiple source. That's going on in the business community.

But what they want to know is what are the set of rules that they can actually develop those multiple sets and drive it. And yet, we've got to make this just transition for energy. We've got to do a lot of things in the world to solve a lot of problems. And the best way to do it is with the cooperative agencies.

And so whether it's the WTO, whether it's the IMF, whether it's the World Bank, whether these multilateral and then governments themselves do 70-20, the idea of coming together and saying, we've got to solve these problems, we can have differences, we can be strategic competitors, but we have to have things that we're trying to solve. And that's what you hope comes out of sessions like this.