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Big Banks Base Economic Scenario Is “Mild Recession”

Banks are still worried about inflation and the threat of a recession this year, but they are preparing for it. In December, the inflation report showed that inflation had risen, making rate hikes challenging for households and businesses.

Major US banks have pointed out that increased wages have cooled prices and revived hopes for a mild recession this year.

“The current environment offers incredible opportunities for long-term investors,” said BlackRock CEO Larry Fink in the earnings release.

Last spring, several big interest rate hikes were seen by the Federal Reserve in response to the December inflation report showing inflation of 5.6%. The results of Friday’s fourth quarter results will show whether these predictions were right or not.

“Higher than expected interest rates pose a significant risk to the outlook for credit quality, loan growth and net interest margins,” said David Wagner, a portfolio manager at Aptus Capital Advisors, in an email.

Last month, executives from major banks also reported that they are expecting slower growth in the economy this year due to higher rate hikes and rising odds of a mild recession.    This is a sign of the ongoing slowdown in the global economy, and investors are concerned that the downturn could keep U.S. economic growth from reaching its full potential. At the same time, rising costs only worsen inflation and put additional strain on businesses who have kept the American economy afloat during this difficult period.

To cover higher costs associated with inflation, some of these management giants have jacked their key rate up to meet their needs. Several Wall Street banks have already raised their key rates in anticipation of an impending recession and World Bank officials suggest that further rate hikes may be necessary to keep companies afloat during this time.

On Tuesday, asset management giant Blackrock revealed results that exceeded Wall Street forecasts, while also warning of a slower global economy. The asset manager’s results came out just one day after The Federal Reserve raised its key rate for a third consecutive Friday, in order to combat inflationary pressures from workers wages trending up and rising prices from companies like Blackrock who are forced to raise prices in order to cover their costs.    

The latest earnings release from America’s biggest US bank, JPMorgan Chase, sets a base economic case for the US economy in 2023 with expectations of a mild recession.

The fourth quarter earnings report from America Corp beat estimates as the loan defaults and credit losses were offset by fresh reserves set aside.

It was a sharp reversal from the third quarter which saw a negative number on the top and bottom lines due to rising provision for bad loans. Analysts believe that if the Fed continues to increase rates, coupled with somewhat higher unemployment expected in 2023 than today, it could lead to a mild recession scenario for America.    

Major US banks, such as JPMorgan Chase and Bank of America, reported mixed earnings in the fourth quarter of 2020. While JPMorgan Chase reported a year-over-year increase in profits, Bank of America reported a drop in profits due to the bank releasing reserves that had been set aside for potential losses.

Bank of America CEO Brian Moynihan said on a same day conference call Friday that the bank’s results “reflects the shift and reflects the addition of more costs.”    

He added: “Our baseline scenario contemplates a mild recession. … But we also add to that a downside scenario, and what this results in is 95% of our reserve methodology is weighted toward a recessionary environment in 2023,” Moynihan said on a call with investors.

Citigroup Chief Financial Officer Mark Mason describes the outlook as “ a rolling country-level recession rather than a simultaneous global downturn.” Mason cited the mild winter as helpful. Moreover, credit card delinquencies are low, suggesting consumer resilience.

“Our base case is still a mild recession in the latter part of 2023,” he said in a briefing with reports, calling the outlook “very manageable.”

He added: “We remain vigilant.”

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