Analysts at the four biggest U.S. banks expect rising interest rates to drive the American economy into a recession this year, according to The Wall Street Journal.
The U.S. will undergo a “mild recession…not like a normal recession” in the second half of this year, Citigroup CEO Jane Fraser said in a statement quoted by the Financial Times.
Fraser also sees “a softening of economic conditions across the Eurozone” due to “structural challenges.”
Bank of America and JPMorgan Chases reported higher fourth-quarter earnings based on the higher rates and said consumers are still piling debt onto credit cards.
However, the banks warned they might see those profits shrink: rising interest rates likely will mean the banks must pay higher yields on CDs and savings accounts.
Citigroup’s profit shrank by more than 21 percent due to losses in its investment banking division. Wells Fargo took a charge related to a regulatory settlement that cut its profit in half, compared to 2021’s final quarter.
Collectively, the four banks set aside $2.8 billion in reserves in last year’s final quarter to cover loans that may go bad if the economy turns down, the WSJ said. JPMorgan accounted for $1.4 billion of the new reserve.
Higher rates already have pushed the housing market into recession.
Wells Fargo, once the nation’s largest mortgage originator, saw the value of new home loans dive from $48 billion in 2021 to $15 billion last year, the lowest value since 2006.
JPMorgan’s mortgage originations plunged to $7 billion from $42 billion a year earlier, the bank’s worst mark since 2004.
The uncertainty over a recession’s likelihood and severity helped make 2022 the worst year for U.S. stock indexes since 2008. Equity markets gave up 20 percent of their value and bonds lost 14 percent.
Economic uncertainty also erased corporate appetites for mergers and acquisitions: investment banking revenue was cut in half at Bank of America and by 60 percent at JPMorgan.
Private equity firms feel the pain
Glum markets last year “had a substantial impact…unlike anything we’ve seen for decades,” BlackRock CEO Lawrence Fink wrote in an internal memo, saying last year’s negative environment cut profits and erased $1.4 trillion from the company’s assets.
Goldman Sachs will report earnings this week. Analysts expect to see its profits down by half. Fees from asset management and investment banking have taken a hit and the bank’s new technology and consumer banking unit has vaporized an estimated $3 billion since the beginning of 2020.
TREND FORECAST: We have long forecast a recession would hit the U.S. and much of the world in 2023 as the cheap money schemes dry up and inflation erodes consumer spending. And there are numerous wild cards that will make a bad situation much worse. Leading the charge is the Ukraine War and one of our Top Trends for 2023, “Middle East Meltdown.”
On the Ukraine War side, we maintain our forecast that the massive U.S./NATO military support of Ukraine will not defeat Russia, but instead, it is making a bad situation worse. Therefore the oil and other commodities relative to Russia and Ukraine that are not being exported to nations will continue to drive inflation higher. Therefore, as wages decline and inflation rises more people will be spending more to buy less, which will push down the Gross Domestic Product of many nations.
On the Middle East Meltdown front, should a military conflict erupt between Israel/U.S. vs. Iran, oil prices will spike above $130 per barrel… crashing the global economy.