What JPMorgan and Other Banking Giants Are Saying A couple of Possible Recession

America’s banking giants are looking into their economic crystal balls, and never all of them like what they see.



JPMorgan
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Bank of America
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and other top U.S. banks recently offered economic outlooks alongside their fourth-quarter financial results. The consensus: While economic headwinds won’t be as dire as once predicted, this yr will still be anything but smooth.

Banks and consumers alike are grappling with the impact of persistently high inflation and tighter monetary policy. The Federal Reserve, in a battle to tame inflation, raised rates of interest seven times in 2022, and has indicated that it should enact additional rate increases in 2023. The hope, after all, is that the Fed’s moves will end in a so-called “soft landing”—meaning the economy slows enough that consumer prices come down, without dipping right into a recession. A few of the U.S.’s biggest banks don’t see that because the almost certainly case, nonetheless.

The newest data suggest that higher rates of interest are finally putting a dent in inflation—after it had accelerated 9.1% last June, its fastest pace in 4 many years. In December, U.S. consumer prices rose at an annual rate of 6.5%, marking the sixth straight month that the pace had slowed. However it’s still a good distance right down to the Fed’s goal for an inflation rate of two%.

Fed Chair Jerome Powell himself has acknowledged that some economic pain might be coming consequently of the central bank’s measures to bring inflation back to its goal.

“Reducing inflation is prone to require a sustained period of below-trend growth and a few softening of labor market conditions,” Powell said last month during a news conference, after the Fed had raised its policy rate of interest to between 4.25% and 4.5%. “We are going to stay the course until the job is completed.”

How the economy fares—and the way bad a slowdown could get—because the Fed continues to concentrate on its inflation mission, for now, stays up for debate.

Here’s what the largest U.S. banks have needed to say:

JPMorgan Chase

On Friday, JPMorgan Chase (ticker: JPM) projected a “mild” recession within the U.S. this yr. Days earlier, CEO Jamie Dimon had walked back his widely discussed prediction from last summer that an “economic hurricane” was coming,

“The U.S. economy currently stays strong, with consumers still spending excess money and businesses healthy,” CEO Jamie Dimon said within the bank’s earnings release Friday. “Nonetheless, we still have no idea the final word effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that’s eroding purchasing power and has pushed rates of interest higher, and the unprecedented quantitative tightening.”

The bank also included a $1.4 billion net reserve construct, for soured loans, which was “was driven by updates to the firm’s macroeconomic outlook which now reflects a gentle recession within the central case,” JPMorgan CFO Jeremy Barnum said on the earnings call. Other banking giants have made similar decisions to plan for the longer term.

Bank of America



Bank of America

(BAC) during its conference call Friday after posting a fourth-quarter revenue beat, also noted the opportunity of “a gentle recession.”

The bank also built up its net reserves within the fourth quarter, to $403 million, compared with a net reserve release of $851 million within the year-ago period.

“Our [reserve-setting] scenario, our baseline scenario, contemplates a gentle recession,” BofA CEO Brian Moynihan said on Friday’s earnings call, in keeping with a transcript. “That’s the bottom case of the economic assumptions within the blue chip and other methods we use. But we also add to that a downside scenario, and what this results is in 95% of our reserve methodology is weighted towards a recessionary environment in 2023.”

Citigroup



Citigroup

(C) was also within the chorus of those calling for a gentle recession when it reported earnings on Friday. The bank similarly boosted its reserves for credit losses, to $640 million, compared with a release of $1.37 billion a yr earlier.

CEO Jane Fraser noted that yr was off to a stronger start than expected, but additionally sees that changing over the course of 2023.

“As we enter 2023, the environment is a tad higher than all of us expected, in the meanwhile no less than, despite the aggressive tightening by central banks,” she said on Friday’s earnings call, in keeping with a transcript, adding that the U.S. labor market stays strong.

Nonetheless, “the Fed stays resolute in tackling core inflation,” she later added. “Subsequently we proceed to see the U.S. moving into a gentle recession within the second half of the yr.”

Her remarks were consistent with ones made last month on the Goldman Sachs U.S. Financial Services Conference, when Fraser said she likely anticipated a recession “sometime within the second half of next yr.”

“But all else being equal, and meaning nobody does anything nutty on the geopolitical front, that then looks like a reasonably moderate one because banks are in good condition, corporates are very healthy, consumers are healthy,” Fraser added on the time.

Wells Fargo



Wells Fargo

(WFC) posted a fourth-quarter earnings beat on Friday, and CEO Charlie Scharf was upbeat in regards to the bank’s future while discussing results. Though the bank didn’t predict a recession, Scharf made it clear that it has taken steps to arrange for a slowdown and was remaining vigilant.

“While we usually are not predicting a severe downturn, we should be prepared for one, and we’re stronger company today than one and two years ago,” he said on Friday’s earnings call, in keeping with a transcript via FactSet. “Our margins are wider, our returns are higher, we’re higher managed, and our capital position is robust, so we feel prepared for a downside scenario if we see broader deterioration than we currently see or predict.”

He added that the bank was monitoring the impact of upper rates of interest on its customers.

The bank also beefed up its provisions for credit losses within the fourth quarter to $957 million, compared with a release of $452 million within the year-ago quarter.

Goldman Sachs



Goldman Sachs

is about to report earnings on Tuesday. On Friday, the bank said it has lost $3 billion since 2020 in its foray into consumer and transaction banking. Last week, it announced job cuts of greater than 3,000, Bloomberg reported. The cuts were resulting from a slowdown in business, losses from challenges of entering retail banking, and overall market uncertainty, in keeping with the report. Investors will definitely be watching what the bank has to say in regards to the economy when it reports financial results.

Write to Emily Dattilo at emily.dattilo@dowjones.com

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