Fed Has Won Battle Against American Spending, BofA's CEO says

The Federal Reserve's battle to rein in inflation by deploying aggressive rate hikes to slow down consumer spending and in turn arrest the rise in prices is succeeding, Bank of America CEO Brian Moynihan said on Tuesday.

Since March 2022, the Fed has raised interest rates to a two-decade high to its current range of 5.25 to 5.5 percent to fight off soaring prices that at one point hit a 40-year high. Inflation has declined to 3.7 percent in September but it is still at nearly double the Fed's 2 percent target rate.

At its last meeting in September, policymakers indicated that they plan to retain a higher interest rate environment for longer to ensure that inflation has been managed definitively. Consumer spending continues to illustrate resilience despite the central bank's raising of rates pushing up the cost of credit which some analysts say could lead to at least one more rate hike this year.

Moynihan believes that the Fed's efforts have managed to achieve its goal of having consumers spend less. On any given year, $4 trillion dollars pass through Bank of America from its customers that in 2021 to 2022 grew by 9 percent. That now has grown to about 4 to 5 percent through the year, Moynahan told Bloomberg in a televised interview.

"The consumer has been slowing down their spending because interest rates take a toll," he said.

With student loan payments restarting after the COVID-era pause and car and housing loan costs spiking due to elevated rates dissuading Americans from spending, consumers had also done a significant amount of spending during the pandemic. As news of an anticipated slowdown of the economy filters down to households, Americans are becoming cautious about their outlays, Moynihan said.

The 4 percent spending rate points to a slowdown that is consistent with 2 percent inflation, and 2 percent economic growth, Bank of America's top boss said, adding that it was the type of spending seen before the COVID-19 pandemic.

"Frankly the Fed has won the battle with the American consumer and they're slowing down," Moynihan said. "Once it slows this level, it's probably not going to kick right back up."

Inflation has been tough

At the September policymakers' meeting, the Fed suggested that core personal consumption expenditures (PCE), which excludes volatile gas and food prices and the gauge they look at closely, was projected to hit 2.6 percent next year and fall to 2.3 percent in 2025 and get to 2 percent the year after that.

The economy was expected to grow by 1.5 percent in 2024 and expand by 1.8 percent two years later. This was in line with what economists have been referring to as a soft landing, meaning despite high rates, inflation would moderate without too much damage to the economy.

Inflation has been tough on consumers, especially on median-income households of $75,000, Moynihan said, and it explains why Americans have soured over their finances over the coming year, where they expect a recession.

"Groceries are a bigger number, gas prices are a bigger number and it's very difficult," Moynihan pointed out.

People's savings are trickling down but they are still healthy, he suggested. But the decline will start to happen slowly in the coming months.

As employers have become more conservative in their hiring and wage growth has slowed with pandemic trends of "great resignations" disappearing, it will lead to a slowdown in spending, Moynihan said.

Bank of America reported strong results on Tuesday, with earnings up 10 percent to $7.8 billion in the third quarter.

"We did this in a healthy but slowing economy that saw U.S. consumer spending still ahead of last year but continuing to slow," Moynihan said earlier in a statement.