Bank of America CEO: ‘The American consumer is very strong’

Bank of America CEO Brian Moynihan speaks with Yahoo Finance's Brian Sozzi at the World Economic Forum (WEF) in Davos, Switzerland, about rising inflation and the American consumer.

Video Transcript

BRIAN MOYNIHAN: Justin, pre-pandemic he'd have said about 15% to 20% chance. So he moved it up. And that's because he's a believer that the Fed has to take some aggressive rate action. He was the first to call for, I think, seven rate rises in January, February. People thought he was crazy. And now, the whole market came that way.

So the idea is why they need to move that aggressively? Because inflation is real. It wasn't temporary, it's real. But there's a good aspect to what's going on in America now, which is American consumers are very strong. So that presents a challenge to the Fed, but it's also a good thing to be working against.

Their leverage is in great shape. Their account balances have gone up very dramatically. Even though stimulus stopped in March of last year, the account balances of our customers of Bank of America have gone up every month since last June or July-- went up faster March to April than they did any other month.

If you think about the ability to borrow-- the credit card balances are still down from $100 billion to $80 billion. That means the same customers could go back and borrow the money. They're highly creditworthy. If you think about their spending-- their spending in the month of May, the first two weeks, is up 10% over last year. They're out doing things.

Now, it's shifted more to services-- travel, restaurants are strong.

BRIAN SOZZI: So May good?

BRIAN MOYNIHAN: It's good. May is good-- up 10% over last year. And by the way, that's overcoming the tax payments. If you remember last year, you could pay your taxes in May. A lot of people took advantage of that. So that's even overcoming that 10%-- transactions have only be up 8 or 9. All that's good.

Now, there is a different side to that. Actually, even if you look at our customers, receipts from their paychecks is up 8% year over year. In other words, we can see, not Bank of America employees, but other-- you can see their periodic payments come in. The good news is that is great place for America to be relative to the rest of the world-- that strong consumer-led economy. Our consumer economy is as big as China's economy. This is a very good thing.

The tough thing is with low unemployment, wage growth, then the Fed's job is tougher. And that's the conundrum. So Michael has them slowing down the economy. It gets slow in the second half. And then, he hasn't announced 24, but my guess, it will start to come out. That doesn't go into recession by his current prediction, but the probability went up.

BRIAN SOZZI: All right, so no recession this year-- good thing. Maybe not next year, but is that a stagflationary environment?

BRIAN MOYNIHAN: No, they've got to choke off inflation, and that may drive growth below trend. So our predictions this year are 2.56, next year at 1.56. And that's been down. If you and I were talking January, that'd have been probably 3.5. So they've dropped a whole point, plus, off. And that goes below trend, which means they've actually over overshot slowing it down. So his thesis is they'll get inflation under control.

But again, that consumer is going to make it tougher and easier because frankly, if people are employed and have money to spend, that means that the US economy will continue to be strong. And that's not a bad thing.

BRIAN SOZZI: Brian, you're the only Bank of America CEO that I have known in my career. And I was thinking back last night on the crises and the things you have seen-- the cycles you have seen. Are you confident that the Fed gets this right-- this rate hiking cycle-- they get it right where they can raise rates, bring down inflation, and the economy still grows?

BRIAN MOYNIHAN: So let's go to the other case-- what if they don't? What if we go into recession? Most people even say, if you look at the blue chip economists, none of them have a recession in the next two years. They may change that next month. But as of May-- there may we need to go down the survey-- if you look at the street economists, none of them predict negative quarters and stuff.

But if they get it wrong and it was, an the end of the day, with this much money on the sidelines and stuff like that-- and the markets already reacted to the rate, they've already priced the 10-year up even though it's come back down-- a lot of adjustments are being made. So that's going to be-- so it'll be shallow. But the reality is the rate structure has to move up. Why? The economy is bigger than it was in 2019. The unemployment rate's lower. The projected growth for this year is actually stronger than the projected growth was for '20 before the pandemic. Why wouldn't the rate structure be at least the same?

And they've got to put it up to normalize that. And when you do that, then you don't have false growth-- any inflationary growth. So I think that that's a good thing. So I think as you think about it, they have to slow down the economy or go below trend. If it goes into recession, the way we [INAUDIBLE] it right, the way we've driven responsible growth for the last decade, plus-- we stress-test at every quarter. We know that a 10% unemployment looks like. You see it in the stress test. You'll see the results here in a few weeks, I think. And you'll see it, and it shows we have the cap liquidity. And by the way, the whole industry does, and that's a good thing.

BRIAN SOZZI: That is a good thing. So when you talk-- a lot of CEOs, and executives, and global leaders come to you for advice. When you talk to them, now, how concerned are they about an economic slowdown? What do you hear in their voice?

BRIAN MOYNIHAN: So the challenge for certain people is they're having inflationary pressures and they try to hold price, and therefore they got pinched on margins. And you saw that come out. But that will adjust its way through. The interesting thing is, a little phenomena going on earlier in the year and late last year was a lot of people got people from higher inflation economies to come work in the US and say, you have to move on price. You have to get your balance back. If your inputs are going up, your outputs have to go up.

Now, the scarcity that was driving this is also a different measure, so people can't get stuff. So if you have a parts manufacturer, you're willing to pay to get the raw materials to get that part out because you know it's going to be-- it's already four weeks old. Backlogs are huge. I've talked to a company that makes parts for golf carts, and their books for December, the fellow said. Every piece of plastic that didn't get home to make the golf cart piece, they grab it. Whatever the price, they'll pass the price.

BRIAN SOZZI: I have been playing a lot of rounds.

BRIAN MOYNIHAN: But that's different from somebody else who can't pass their price. So it's a little different outcome CEO by CEO, company by company, business model of how easy it is to pass that price. The reality is, these supply shortages have to get normalized for the economy to normalize. And we thought that would be over by now. It's still difficult. And that's another one that we have to worry about. But you know, that ebbed got a little worse, got a little better. So that is something, I think, the governments of the world have to really get done, which is get those things restarted.

BRIAN SOZZI: What we're seeing in the markets right now is a market that I don't think a lot of people have seen before. You've seen pretty much everything. Do you think that feeds back into how consumers spend and hits their-- it is hitting their wealth? Do you think they go and cut back on their spending?

BRIAN MOYNIHAN: So in the-- a lot of people talk about zero trading and digital brokers and stuff. In the '90s, we had Suretrade and all these companies. And I had-- if you looked at the MSHA conference numbers and trading volumes in retail, they ran together. Now, which causes which is an interesting question. So the reality is when consumers-- the market's up and they're feeling good, they trade more. When the market comes down, they trade less. So as consumers will adjust to the fact that the wealth effect of their homes, the wealth effect of their things.

The reality is they're still up a lot from-- if you take '19 as a baseline, and you look at prices of real estate, it's still up a lot. You know? So it'll come down or flatten out-- the new homes or whatever, the sales of today were down a little bit. That's all-- that's the expected outcome the Fed has to achieve to slow things down. So yeah, they'll adjust. And that's been true for 25 years-- I have in this business. $0 trades are not a new concept. We did it in 19-- 2006 or '07, and had buses around. These are not new concepts. You applied differently, talked about it differently.

The reality is if people feel wealthier, they spend more. Wealth affects a broader base of consumers. And most economists know because of the 401(k)s and other translations. Now interesting, as a stock market adjusts, now that was used in compensation. That creates an interesting dynamic because people got paid in stock. I get paid all but my base salary in stock. And it's worth less, but that's not really relevant. But if you think about an average employee at a technology firm-- this downdraft, that creates some pressure on them. That'll be interesting to see them adjust to that.