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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business App. I'm very pleased to say that joining us now is the Bank for America Chare CEO, Brian moynihan. Brian, of course in London, we're here in New York. You're actually in our home and we're in yours. So thank you, sir for making that happen. Brian, Let's get to this leadership shake up because we've got a lot to talk about. Eight lines of business, two
very prominent individuals in this bank, at this institution. How do you and the team plan to split up responsibilities.
Well, it's good to talk to you both, and thank you for coming.
To our great corporate headquarters.
Hope that they're treating you nicely out there. Look, this is a recognition of three teammates, said Dean and Jim and Alistair, and they contributed to they made to our company and helping bringing Jim and Dean to help me leverage across the businesses.
And there's a lot of initiatives we.
Conduct across the company, our growth work streams, our operational.
Excellence, our.
AI initiatives and things, and I've asked them to come help me. Meanwhile, it also frees up space for that talent group. And you're talking to a lot of today what's Lindsay or Eric or Wendy and others that continue to drive those eight businesses for us and own the business and own the responsibility for P and L.
And there's a lot of talent that levels.
So the idea is to bring them to help leverage my time, leverage a company's time, leverage a company wide initiatives, and then let that talent that drives those businesses keep making great progress.
Brian, there is an obvious I have some comfortable questions. Some people might have responded to this and just thought, is Brian's setting up for six session or is this just about change and how the companies.
Run well long term.
We have one of the duties that I and the whole management team owes the board of directors as a series of candidates that have the experience to run this company over time. I'm not going anywhere in the short term, but in the medium term. But it takes a while to set that up and get people used to the size and scale this company. So you all report all those ins and outs of succession, but the reality.
Is we're a team and we're driving forward.
There's a lot of talent teammates and the board will have to make a decision someday based on the facts and circumstances at the time.
Brian, you talk about some of the new initiatives and looking forward to the bank, the Dean and the gym that will be of the future partnering together. I'm wondering what you're hoping they can accomplish, whether it's the AI initiatives or beyond, what kind of projects you're hoping that they will spearhead.
Well, we have a lot of things going For the last six last year, we've been working on some work streams to help drive expense sufficiency and implementation new technologies and at the same time drive growth. How we take risk and continue to look at our risk parameters and so what I'm asking them is to and they've helped drive those well, they've been doing our old jobs and I've said, come do this full time and that'll give
us more leverage across the platform. Our company has a great reach we have, you know, we're all over the globe and Bernie Men's and the team here and out of London run all the.
International businesses for us.
We're in a lot of countries, a lot of teammates around the world. We just announced a thousand more teammates that we're building out here in UK and they can help the company drive that and put the key to the top of big company of guards is to work
the seams, work the business connections. And so Jimmy this capabilities as he works for the Wealth Management Group and Lindsay and Eric on the clients that we have, especially in the high you know, the hirer end clients that he has relationships with who are hedge fund operators and things like that. So there's a lot of inities, but it's it's really about revenue growth, organic revenue growth and
expense efficiency and also thinking through how technology applies. It just gives me more power at the top of the house to join us. And these teammates have done a great job.
I imagine it's going to be united. From the investor day in November, the first one in some fifteen years, you mentioned the CFO now Executive vice president Alistair Borthwick said this, the most important thing from our perspective is we feel like we've got an opportunity to close a relative value gap. Brian, can we talk about that relative value gap? Where do you think that comes from? What is it that you think perhaps investors don't fully understand.
Well, as you look at the company, you have a greater granted growth engine. So we'll do a million new checking households, and our average checking.
Balances are three times four times industry norm and we're building that up.
What we're trying to showcase is what Bank of America is is an organic growth machine on a very steady compounding basis. So if you look at the projection for our earnings growth rates by the street, they're faster than the average company as the balance reprices and things go on.
But trying to showcase is to put on the table basically the metrics that we run this company by across the eight lines of business and how they work together, and then the international piece, and then AI and some of the other things we work on the payments business, which is embedded in the lines of business but is a separate business.
It really showed three things.
We have a competitive position that no one else has where you know, we just announced yesterday with the largest small business Lenner. We have a competitive growth rate in the organic growth that's there.
And then because of.
Our the dynamics are a NII lift which it will be growing as we've told people six to seven percent this year. You're going to see the EPs KEYP kicking in and the operating leverage come into the business and the return on tandem common equity keeps moving up.
And that's that's when we lay up.
But gears off that good core or granted growth with the right risk that we drive.
This company by.
Brian as John is just mentioning this is the first and fifteen years, why now what changed for you? And is this going to be a new annual thing?
You know, I think we have thirty five Analystic covers. We spend time at all the conferences we spend time individually, but think about putting on a table to know where the company stands right now. As we see after the pandemic and after the interest rate changes and after inflation fights and all that stuff, we see that people putting on a table where we are in organic growth and how it works together is critical, and I think, yeah, you should expect us to do it more often.
You know, we have a lot of connectivity to the people.
Actually own our stock and talk to them all the time, but this is a chance to sort of lay it all out so they can see it together and to look at some of these initiatis are unique, like our employee Banking Investment Initiative, our continuum, our Marril Edge through Merrill Lynch and a private bank, and the ability for us to take a customer literally from the first bank account their entire life, no matter what happens to them.
On an individual side, or a small business for me today that becomes the largest company world, or an individual trader that builds up that capability and becomes a hedge fund manager. The idea of these continuums and things like that are really important, and so we hope to put that on a table and make sure people see it, and then we'd annually update it, but sort of put a baseline on the table.
So, Brian, it seems like you're moving toward a greater degree of transparency or at least availability at a time where the President is talking about potentially moving from a quarterly reporting system from public companies to a six month reporting season, do you think that that would be helpful for you as a business manager if you had to report less frequently in terms of filing.
Yeah, At the end of the day, we run the company along the principal's responsible growth and how we run it, so it won't change how we run the company, may change how often we have to talk about it, and inherently, if you do two times a year versus four times a year, you'd save some money and some effort. But my guess is our investors are going to demand from us more constant reporting. So we'll see it all play out. It's an issue that was talked about over the last
several years. If it's going to get done, it has to be done the right way. So it remains in place and we look forward to what comes out of the SEC and the process. But on the other hand, we are very transparent what we do. We put a lot of information out there, things like our digital capabilities that no one else reports on quite frankly, and again with the investor Day, we'll be able to show that and really challenge people say, look, if this is what's
going on. If you've taken a company at three hundred thousand people fifteen years ago that has two hundred and twelve thousand people today and applied that technology, you just think as we start to apply AI more fully, we already have Erica three billion customer interactions, but as that applies more fully, you'll see the ability for us to continue to manage the headcount and the company well while
the revenue keeps growing. And so I think we'll report on that more often than every six months, is my guests. Based on the demand of our investors.
Lisa, I imagined some CEOs might welcome this. Yes, even if some investors done, they.
Might welcome this, but will they be allowed to actually follow it by their investors?
And that I think is what Brian is alluding to.
I think investors will demand much more transparency. Brian, I want to talk about an initiative close to your heart. The news that we got about fifteen twenty five minutes ago that you're increasing the minimum wage to twenty five dollars per hour. I remember a very early conversation with you, and this is something you're very proud of. This has
gone up from say fifteen several years ago. Can you talk to us about why you've maintained this commitment to drive in the minimum wage higher at Banks for America.
Sure, so, let me set two things up.
One over the course of today and tomorrow and yesterday, we've announced a series of insues.
One is to locate one thousand.
New teammates in the UK that will work in our operations group, and that was announced by Bernie and Tom Scrivener. The second one is torease to commit to our military hiring at Bank of America ten thousand military veterans over the next five years.
We've done this from time.
We have about twenty thousand working to increase that. Another is to increase eight thousand people from community colleges to print an opportunity at Bank of America to further the career and get into skills based training. That's a doubling or tripling of what we do today. And then we're the seventy five branches that we're deploying and the teammates there.
And the third piece is the minimum wage.
And so we started on a travel a number of years ago with a view that to be we want teammates to come to Bank America with a career mindset, so join us. So today we're announcing twenty five dollars an hour, which is fifty thousand dollars for a starting salary across the country and hire in some places where the prevailing wages are higher. Obviously, but what that gives a teammate a chance to join our company, spend their
whole career here, and support their families. So not only is it the twenty five dollars an hour minimum starting wage, it's the benefit structure, which is a full four and K match, a full benefit costs that we for the teammates in the brackets of twenty five dollars an hour. We basically dropped their premium coverage and healthcare in twenty twelve from five hundred dollars a month to two hundred and fifty dollars a months.
Our family have.
Never raised it to provide great health care forum and then our childcare benefits, so it's a package. So where's that payback for the investor. Where that pays back to the investor is the turnover rate. And when we started this program in the high volume operations groups and the branches was twenty percent. It's now down to basically tennis percenter.
So even below that.
That stability in that career mindset allows us to do a much better job for our clients. And what you've seen is the attrition in the term teammates has gone down. You've seen the attrition the customer's gone down, and you've seen our customer scores dramatically improve over the last fifteen years due to this relentless pursuit to be a career employer.
So yes, we're very proud of twenty five dollars an hour, but there's an economic benefit for the shareholder and there's a great position for the teammate at the same time.
Brian, I wonder also what it says about the situation the current environment. It's very strange that we're going into this decision with the Federal Reserve talking about twenty five fifty basis points of rate cuts and maybe more. Your team has talked consistently throughout this morning about the amount of resilience they see in the US economy. Payhikes like this aren't the kind of things you would typically see
in a recession. What's your sense of just how tight a week loose this labor market actually is right now?
Well, I think if you think of twenty three summer, you know, the great resignation, it was very tight, then it loosened up, and it's more imbalanced now. So our turn of rate in our company is running about eight percent. It even in places like tech programmers, of which we have thirty forty thousand of them, we're running in double digits is now and three four percent. And what that shows you the bin in the markets different, which then
shows you people being more careful at headcount. And you heard some of my colleagues talk to you about that.
So I think the.
Unemployment rate is still low, but I think businesses are being much more careful in management a headcount for.
A number of reasons.
One is to get by understanding how all the policies are coming at and fit together. I'm talking about US businesses mainly, and then secondly, they're also making sure that they're careful. And I heard some of my colleagues talk to you about this earlier. As you think about this application of technology, we know what this does. We have half as many people work in the consumer business, and did we did a decade decade plus ago. We have
half as many people working operations. We know that as these technologies could apply to our legal department, our account our finance department under alistair, our risk department, teammates. We know that if we manage the headcount carefully, we will do it. So we look at headcount very carefully and say, don't hire people unless you really need them, not because we're trying to save money, because frankly, from a human management capabilities, we don't want to have people who won't.
Be able to have a career here.
So we just hired two thousand plus kids from school, so we brought in all those new talent. We'll hire these ten thousand veterans, we'll hire these eight thousand people from community college. But each month we get the right to make a decision on whether we're going to hire about thirteen to fifteen hundred people.
And we're just managing that very carefully.
So I think we're an example of what's going on to broad a labor market.
You heard Wendy and.
My colleagues talk about it. All the companies are trying to manage us and make sure they get the headcount right because that is a major expense for a lot of firms.
Brian, about a year ago you were talking to us about the ramifications of AI and the explosion of efficiency, and you said that you think that headcount could remain about the same at the bank even as the business continue to expand, just in total size. I'm wondering if that's shifted, if you still see that as the natural progression of the relationship between the adoption of machine based learning and the relationship to your headcount.
So there are two things that one, I think the time we were talking, we are probably closer two hundred and sixteen seventeen thousand people or two hundred thirteen thousand, So I think we'll be managing this down.
But remember, at the same.
Time we're managing out through operational excellence and efficiencies of applied technology. We are now we are deploying, so we're adding when he's added commercial bankers and all the markets and sharing a team added business bankers and all the markets, and Katie and Lindsay and Eric adding financial advisors and private bankers. So we're adding front end people, sales traders, et cetera. To keep building out our capabilities, and so there's a reinvestment going on. The key to that is
really to read a eploying people and reskilling them. So when we bring these two thousand plus teammates and who just joined us in the last month and a half, we have to be more mindful about training them along multiple dimensions than we might have been two or three
years ago. So I think, yes, I think ultimately the human being content of our work product would probably come down, but if we manage it right, it'll be flat to the same amount of people, maybe down a little bit, but all paid more and all being applied to the highest value tasks where frankly, the machines can't do the work.
And that's the important thing.
We know these We know what this AI can do in today's world. Erica has been out there for seven years, three billion customer interactions, twenty million customers using.
It all the time. We see what it could do.
We took that and put it in our commercial business We took that and put it in our internal process. We got other models to help in Jimmy DeMar's business in terms of a thing called optimists and things like that. There's a lot of out there, but what you're learning is is still augmented intelligence and that will be what's driving the near term efficiency. So yes, I think the headcount management is one of the core tasks that managers have to take.
Seriously, I'm just wondering, Brian, as you train all of these new students, how do you make sure that they stay with you and don't go to some of your brethren across the way in the private asset sphere.
Well, we provide them a good opportunity and look, they can go other places, but we've been able to retain enough. We're completely happy and look even for our clients.
Frankly, if they.
Hire our teammates, it's not the worst thing that happens in all our businesses. But the roality is is that we want these teammates to have a career mindset. In October, I'll celebrate our teammates have been with our company fifty years, fifty five years, sixty years, et cetera. And you hear their stories and their stories of I joined this company, I worked in a summer internship, I came may even.
Work part time during college.
I became a full time employee and I started doing this and now I do that. And those are wonderful stories, and we have them tell those stories to our teammates to show you that you can have a long term career at a company like ours. And that's what we want our teammates to come in with. They may not stay in trading or investment banking or corporate banking, but they'll have long term capabilities here.
And you've seen that.
Even top of house Alistair was a capital market sead and now he's the CFO, and so that goes on throughout the company.
They swear an oath of allegiance, yes exactly, and you see them lining up this morning.
That gave in before they come.
In, I promise on my capushino, which is very good.
By the way, Brian, I want to talk about the main fan that takes place later on this afternoon.
I'm not going to ask for your guests.
I know how much you respect the team behind me and some of the official forecast of the bank. I once to understand from your perspective, looking across the eight lines of business, whether you see an economy market activity that demands of rate cut from this Furer reserve.
Well, you've had the benefit of all our experts, and we have the talent of extremely talented research team, and you also have some online of business teammates talk about what they see out there. I think you have to back up if you're if you think about last year this time, the projected growth rates for our team was probably one hundred basis points higher than it is today for twenty five and so that acceleration of growth, the prediction that was largely based.
On a couple of things.
One, rates would stay higher because inflation was kicking in, the impact of the uncertain terrorist et cetera, et cetera, all that's coming through the system now, so you're seeing some certainty fall into place on this. And I think
also inflation was coming down. And I think so the tension the FED has to deal with, and you've been picking out it all day, is a tension between a higher inflation rate and ultimately where FED funds could settle in at And so whether they do twenty five basis points today or fifty people have to keep in mind the growth rate in economy was brought down and now.
It's starting to go back up.
So next year is predicted to be better this year and the year after is better than that. So you hear teammates talk about the economy growing back out, and that then means we're on the other side of it, And so the FED has to adjust to the inflat picture. As it got more in control. They can come down. They came down to one hundred basis points already. It can keep coming down, but they've got to be very
mindful of the inflation side. And so I think when the people get in the room and they see the data, they have to think it through.
The big newsance that you're referenced.
Early was the labor market's gotten softer, so that gave them concerns. So I think, you know, the market believes and our teammates believe the cut rates, but I think the key for people is acceleration and growth and will growth reaccelerate. Our teammates seeing that we're seeing consumer spending strong and all those things which would indicate we'd see the acceleration next year is better than this year. Unemployment is not expected to go up a lot, even though
the employement picture may be softer. But the most important thing is the long term interest rate scenario people projecting is a more normal rate environment that we saw before the financial crisis, say three percent plus or minds on the FEDS fund rate of four to four and a half percent or so, on a tenure rate, and a
curve that's not inverted, that's normalized between that. The important thing is to get back to more of a normal environment, frankly with maybe a little higher in fla because a great debate about two percent is something you can get. Lots of experts talk about a little higher inflation, a little faster growth, and then frankly that'll help with some of the debt carry and other things going on in the US economy.
Brian, it sounds like next year you see the bigger risk as potentially a surprising a bout of inflation and some sort of downturn.
Is that correct?
Well, I think the question is is how do you tolerate the inflation and temp the nature of it, what's come from. But you know, and I think that's the tension. All this I think is next year, as you get to the second quarter. As these policies are now in place and are behind us, are you going to see the acceleration and growth and where our businesses get start best,
even faster if you listen. I think if you ask Wendy about it, she would tell you her commercial customers that have lines of credit are still borrowing less as
a percentage of their availability than they did. It's sort of the seventeen eighteen nineteen timeframe where rates have been have been moved up and the economy is growing, and so why is that It probably not seemed quite the opportunity, and so they're trying to sort this all out, and well, you know, I've got the benefit in the honor of leading company, has this talented team behind us, and all the talent and money we spend on research and everything.
If I'm running a company that the three of us owned and it was a manufacturing company, I got to figure out all myself that tends to hold people back. So that would be the case for acceleration. And then the question is if rate stay a little higher and the growth is hired, that's not a bad place for the America to be.
Brian, just before you go, what is to sneak this in one final question, Whose door do I need to knock for World Cup tickets?
Who makes that happen here?
Well, you missed.
You didn't bring David Tyree on, who's doing all our marketing and work, and so he's the guy that's got control of the tickets video has a great job.
Or is look our relationship with FIFA. You know we did the you had.
The Club World Cup, which was sort of the warm up and next year and you'll see us accelerate our efforts. We have great capabilities for our clients. But most importantly, this is a chance for America to showcase football soccer as we call it. It's a case for these cities that are hosting to put on a great show. And I think I can see the enthusiasm building.
And you're not the first person that ask for take us, John, stay with us.
More Bloomberg Surveillance coming up after this. Savita Subramani, the head of US Equity and Quantitative Strategy, right in the following It is difficult to be outright bearish on risk assets with signs of profits continuing to accelerate alongside a FED that is more likely to ease than hold short rates. Savita plus Jill Carey Hall, the head of US Small and midcapt strategy at Bank for America, joined us Now for more guys going to see you both.
Great to be Thanks for being here, Savita.
I want to start with you a central message of your research for a long long time. Never underestimate the resilience of corporate America.
That's right.
Is that a mistake? People have made it too many times this year so far.
Yeah.
I think we even made it after Liberation Day and thinking that, you know, we were going to see companies not being able to guide, not being able to navigate this really complicated environment. And what we saw is corporates handling this with a plum and essentially they continued to guide on earnings. We saw no paucity of information. We heard a lot of companies talk about their teriff mitigation tactics, which I think was interesting because they've seen this before,
they went through this in twenty eighteen. Obviously this is a little bit more extreme, but companies know how to manage. They just need a plan, and I think that was what we were hardened to see.
It's all to have this conversation about twenty five or fifty from the Federal Reserve. At the same time, the equity market is close to all time highs, and you and the team here at Bank for America are essentially forecast to get acceleration and earnings for twenty twenty six.
Can you make that make sense to people I'm listening to.
This, Well, yeah, we're actually forecasting a slight deceleration but broadening out of earnings. And what I think is really noteworthy and what investors need to pay attention to, is the idea that the four ninety three is actually back in the black. These are companies that are making money, so it's not just tech all the time, which has been the story for the last few years. I think what's also interesting is that tech companies are spending, and they're spending on everything.
They're spending on power grid.
Which is actually positive for overall economic growth, it's positive for commodities, and I think that's the message we're giving investors today. What's really thwarted broadening this year, I think, is just this bomb of tariff uncertainty that was dropped on April second, and we're at a point where clarity has improved vastly around that, and that issue.
Not just the four hundred ninety three the two thousand, and I am wondering jail. We have seen a complete outperformance from the Russels two thousand of late, and you actually increased your expectations for some of these companies after being pretty sour on them earlier this year, especially after Jackson Hull. How much is this entirely predicated on what the FED does rather than what Savita is talking about, which all sounds lovely, but it's been in effect for quite a while.
Right Well, I think the FED has certainly been the biggest, one of the biggest drivers of the Russell two thousand over the last year or two. Some of the biggest rallies and sell offs we've seen have been around FED expectations or data that feeds into that.
So I think, you know, the expectation of.
Cuts coming is certainly more positive for the Russell and should lead it to outperform near term.
But I think.
Also what investors have been focused on, perhaps more so than usual, has been the profits backdrop. Because a year ago everyone was expecting that by mid twenty twenty four small caps would have come out of their profits recession, that earnings would have broadened out and been outpacing large caps, and that just kept getting kicked out and kicked out, and we finally saw small caps come out of the profits recession. This earning season, we saw a big beat
by these companies. We saw much better guidance, So that's been a positive sign. I mean, the sales data, the top line growth was a bit more lackluster relative to large caps, So that's something to pay attention to as we go into the next earning season. But the fact that profitability is finally recovering and speaks to that broadening out of earnings is a positive.
Is the pop on the heels of a potential fed rate cut because of just simply evaluation story that lower benchmark rates make it more attractive on a relative basis, or is it that actually they will borrow more, that they can do more that they aren't doing now, whether it's engage in M and A, whether it's engaged in acquisitions, whether it's engaging in hiring plans.
Right, I think it's a bit of all of that.
I think, but for small cap companies, they have a lot of debt, much more than large caps do. They have a lot of refinancing risk, they have a lot of debt that's coming due over the next five years, so there's a big focus on their interest costs at a time when their earnings have already been struggling for several years now in this profits recession. So you know, the FED is likely a bigger driver than usual given that focus, given their leverage.
Profiles right now.
So combine that with some of the positive positives we're seeing on the profits backdrop, and I think that's a positive near term. Now, the sustainability of the rally, I think will depend on you know, revisions, those top line trends, the manufacturing recovery. Small caps tend to be very sensitive to the ISM manufacturing indicator, which has struggled to get back above fifty. So a lot of these factors will be what we're watching to see how sustainable this rally in small caps could be.
We had a guess to come on the program a few weeks ago that said to Lisa, can you name a company on the Russell two thousand? Very few people can. When they buy the Russell, what are they buying? What's the concentration risk around say, small caps relative to Saveda's world large caps in the s and P five hundred.
Right, Well, there's some sector skews, certainly in terms of more biotech. There's a lot more non profitable, non earner type of companies within the index, whether it be in biotech, small caps, software, regional banks, reach. There are some of these areas that are bigger within the Russell. But I think what's important is that there are still risks to the index. There are a lot of like I said,
nonprofitable companies that's elevated versus history. So I also think it's a very good environment to pick stocks within the index. Our analysts here cover over nine hundred small and MidCap US stocks, So you know, amid all of these uncertainties, whether it's tariffs, whether it's how sustainable is this profit's recovery, if you can focus on companies that you know have
better earnings, revisions, have stronger margins. There are a lot of beaten down stocks within the Russell, and small caps overall are trading at these big relative discounts to larger companies. So it is a good environment for stock selection, and we've seen the interest there. We saw a big uptick in attendance at our recent Smidcap conference. We've seen investors buying small cap stocks this year.
Well, when you brought it out, this sort of complicated backdrop goes to cdda recent change or both of you at recent change. In the outlook ahead, you only see a six percent gain from here until twelve months out until the same time next year to a better seven thousand. That's far below where a lot of other people are. Why not hire, especially given the expectation for earnings growth to truly reaccelerate.
Well, I mean, here's the here's the problem. The ballast of the S and P five hundred has been tech, and tech earnings are slated to decelerate. I mean, these companies are really big. It's harder to grow as fast. These are companies that are spending more money on CAPEC so they're returning a little bit less capital than they
used to doing less buyback. So I think that's the other side of the story is the theme around AI, and I think what we would need to see a much higher return and even a positive surprise and earnings at an index level is continued AI monetization, big surprises akin to what we saw in the second quarter, And it's harder and harder to forecast that as we move forward and these companies get bigger and we're more deeper
into ai monetization cycle. So our analysts are bullish, but we are still seeing a deceleration in that area of the market. And then the other kind of simple fact that we all know is the market tends to anticipate earnings recoveries. We've seen some great returns this year. I think that's in anticipation of what's to come. And you know, typically in the best earnings years for the S and P five hundred, the market actually posts kind of you
know mech returns. So I don't know if we're going to see another blockbuster year of returns, but I do think that earnings are going to broaden out and that's going to be an exciting story.
Given the focus today anticipating the federal serve decision, how relevant is that to your world?
Look, I mean, I know everyone is obsessed with the Fed, but I think that long rates are much more important for equities. And we've talked about this, so you know, short rates have actually done very little to stemy large cap company performance because their balance sheets are healthy, they have less floating rate risk, they learn their less during the financial crisis and really managed their debt risk. So I think the long end is more important. And here's
where it gets complicated. If the Fed is cutting but inflation has not been you know, sufficiently managed, I think that's the that's the risk. It's the long end, you know, absent yield curve control. The long end, I think is is really you know, potentially more dramatic for the S and P.
So that's what we're watching.
Is that something you're focused on, the risk of a repeat of what we saw last year when the Federal Reserve cut interest rates and the long end actually sold off and yours rose.
But I think about one hundred basis points.
Yeah, we had a real steepening. I mean, I think that's good for certain sectors and bad for others. One reason we're overweight financials, you know, energy some of the more inflation positive sectors that are geared to inflation, those are sectors that can do well in that environment. As long as this is not a disorderly increase in the long end, which is what you know we all worry about, especially on this desk.
The good news is so far through September, stay with us more Bloomberg surveillance coming up after this, let's keep it on the federal reserve. Sticking with the economy, the senior US economists here at Bank for America Securities with this to say, another cut in October maybe on the table if the labor market were to weaken significantly further, but it isn't our base case. A DT joint us now for more at each and.
Monk, good morning, Thank you for having me.
Thank you for having us.
Twenty five bases point cut expected later on this afternoon. How much guidance can they provide beyond just that?
I think that's going to be the key question. What does the dark blot show? So our base case is that the dark blood medion will show only fifty basis points of cuts this year, so another twenty five potentially in December.
And the reason we think that it.
Will only be fifty rather than seventy five is that if you look at the macro forecasts from the June SEP they've actually aged remarkably well. Unemployment is on track to meet their forecast, so as inflation and growth, if anything, will come in a little bit stronger. Obviously, you've already heard a lot about the risks of reacceleration here.
So given that, and.
Given that the dot plot medium almost showed one cut back in June, even a little bit of a dubbish move would still probably keep it at two.
You talk about a dubvish move, there's a question about the actual cut or the signal going forward, not just the signal and number of rate cuts. But something Mark Cabanni or colleague talked about earlier was the idea of the third mandate, the idea of keeping rates moderate over a longer period of time as one of the three pillars of the federals or if that were adopted, how much would that change your outlook as an economist.
So moderate is not a clearly defined term, So we'll have to see if going forward, potentially different group of people at the FED have a different have a more specific definition of moderate. But for now, what I see is an eon me that's probably pretty close to the neutral rate. You look at where stocks are, you look at the fact that productivity might be picking up, and I don't think there is a clear case here that the economy is screaming for rate cuts.
If that's the case, why is an inflation more of a concern, Why aren't we seeing that baked into market expectations just a bit more so, you are.
Actually seeing inflation fixings showing a little bit of a pickup in inflation. Our core view has been that it's not just about trade policy, it's also about underlying inflation, and underlying inflation for US is stuck around two and a half percent, and we think it'll remain that way going forward, which is why even as the tariff effects roll off next year, we only have the core PC going down to two point six percent.
There was quite a difference between July chair pal and Jackson holl chair pal, and understand it was a big payroll report in between, but it was a difference in approach and how we anchored his view around the labor market that got my attention. He anchored his view around the labor market, around the unemployment right in July, and then we got to Jackson Holl and clearly he was
spoot by a step down in payrolls growth. You've been focused on measures of slack and now traditionally that's something the feder Reserve monetary policy makers would be focused on too. Have you seen a significant deterioration in measures of slack alongside this monster step down we've seen in payrolls growth.
So what Powell said in July, which was viewed as very hawkish by markets, was that even if payrold growth is zero, if the unemployment rate isn't increasing, then that's where break even is and the FED doesn't really need to be concerned about that.
And what we wrote at the.
Time was it's one thing to say it, and it's another thing to walk the talk when you actually see the data and that number, that two hundred and fifty eight thousand downward revision, I think.
It's spooked the FED.
And yes, there's been some deterioration and signs of labor slack. You can look at the ratio of vacancies to unemployed workers, you can look at the labor market differential from the conference board. All of those are showing some increase in slack, but it's been relatively modern.
Spook them into one.
I think that's what we're wrestling with today, to a twenty five basis point risk management decision, or spoke them into We need to come out and convey to market participants today that this is the journey back towards neutral and We think neutral is around three, and we're looking to get there quickly.
The Committee is going to be divided on that question, and the key question that will hat to answered today is where does powel land. Is he on the side of we need to do a little bit, but we don't need to do a lot, or is he on the side of we need to go all the way back to neutral. We're in the first camp, but we'll learn more today.
How much are you going to take true signal from whatever Governor Myron has to say? How much is he the new loadstar in some ways of the committee in twenty twenty six, if not today.
I think it'll depend on how much the committee changes next year. That's still an open question. We don't know how many seats will be available on the board, we don't know how much turnover potentially they'll be amongst the regional presidents, So that's I would say, very much an open question. But for this meeting, we know that Governor Myron will.
Be an outlier stay with us.
More Bloomberg surveillance coming up after this. I'm pleased to say. They were joined by Bank of America's newly appointed co president, Jim Demard, Jim's good to see you.
Great to see you.
Is it Jim or Jimmy? I'm always confused. Brian called you Jimmy. You can call me whatever you were gone with Jim either either's either's a more than an except Jimmy. Congratulations, congratulates, Thanks very much, appreciate. It's fantastic to get some time with you. I want to shout by talking about markets before we talk about the operations stuff. I've lost count of how many quarters that you've seen growth in the market's unit?
What are we on now?
Thirteen as of the lasts of the second quarter earnings are coming soon.
We have to wait till those come out.
But you know, we indicated at the Barclays conference last week and when Brian's woke before, you know, in single digits for the market. So knock on wood, we should be u we should be at fourteen.
Where's that growth coming from? And just how crazy? See was the start a Q two yeah, twenty five?
Yeah.
I think for us it's been a story of having the additional financial resources to help clients execute one on what they want to execute because markets have grown considerably in size and market value, and taking a step back
from that. For us, our equities business, it's been a huge focus for us the past four years, investments in you know, financial resources plus people plus technology, and then you know, within the thick kind of sector, if you will, the rates business has been a place where we haven't done as well as we think we can, and we've seen it turn around there as well.
Maybe the FED will help you out, especially today.
A lot of anticipation, as you mentioned, you know, great deal of variance in terms of not necessarily this meeting but you know with the next six to ten months brings us.
John alluded to it, and I think it's a really important point. There's a tension between this push for the FED to ease financial conditions given the fact that financial conditions, at least you could probably tell us what other people have told us, seem pretty easy. Yes, they seem like pretty flowing and people can go out more money if they need to.
Can you square that circle for us?
You know, I think what we've done a very poor job of is talking about financial conditions based on size of companies or you know, individuals themselves. We've broken it down, you know, you had Liz on this morning. We're talking about small business and what's going on there, you know, smaller businesses and on the lower end of the economic kind of scale, if you will. For individuals, they're more
sensitive to short term rates in floating rates. So yeah, if you're a large corporation, you've been you've had you know, easy access to the markets have been very favorable. You issued, you know, you refinanced that back in twenty twenty one, and you locked in some very low rates. Homeowners did the same, you know, mortgage rates were below you know,
three percent. And again if you were you know, if you're a smaller business and you relied on floating rate det and you don't have access to the broader capital markets, this will be a relief. So I think, I think that's a story that people should focus.
So I guess another way of saying this is when the Fed started hiking rates, people are surprised at the economy can just tumble into recession. Are we going to be surprised by if the Fed cuts rates how little it helps boost growth or do you think that it will boost growth substantially, that we will see m and a pick back up, that we will see borrowing increase even more.
I think we're going to have to again bifurcate it and take a look at different parts of the economy and see who's benefiting. But your partner, you know, point on MNA and activity. For all the pessimism and climbing the wall of worry, I don't you know, there's a lot of activity happening across a lot of sectors, whether it's you know, tech, energy, utilities, power, you know, data, financial services. We just saw you know, in M and A activity and you know there's more discussions on that.
Healthcare, I don't know.
Equity prices are high, credits how suficed, and people and companies are making money.
So where on earth are we going? The Fed's about to reduce the whole thing. How are you thinking about things? You've seen so many cycles?
What is this?
What is this moment? Very spooed period.
It's a very different one, that's for sure. There's some information we put out recently that showed when the FED is cut almost every I think it's been every single time, and I don't remember the exact number, but into a strong kind of equity market, we continue to get a rally for the next twelve months.
So that's there.
At least, But can I just push this point.
I want to understand from your perspective, whether it's something more than that, whether some kind of great misallocation of resources is building care. I can't think of many times where I've met investors who are incredibly aggressive about the capex spend of a handful of companies. Yes, it's sent the equity markets to all time highs, and the Federal Reserve again is about to come out later on this afternoon and duce the whole thing by even more potentially.
I understand what they're responding to. It's the payroll story.
I want to understand the consequences from a market perspective, just how dicey things might get further down the road.
Again, I think you, I think we have to see a considerable drop in longer term rates to really get that traditional impact. You know, we had an inverted curve for an extended period of time, which everybody indicated should should indicate a weakening economy, which we which we didn't see. Into your earlier question, I don't think we ever had in history fiscal and monetary possible policy at odds.
And that's what we had.
I mean, everybody talked about, well rates are four hundred basis points. Well, you know, we also had the largest spend by the federal government, you know, in history, not only an absolute dollars, but as a percentage of the economy.
So the policies weren't aligned.
That's a that's a We talked about it a bit, then you know, two years later, three years later, we're talking less about it. But I think it's going to be you know, is this going to be inflation area. I think people have to also think about fiscal policy and what's going to happen there relative to what the monetary policy is.
There's also the idea of doria, which se quite a bit and that's one reason why people have been very optimistic banking space. Does that allow you to take more risk and compete more significantly, say with some of the private asset managers that have really made more headway into the space. Yeah.
I think for us on the and for the industry on regulation, it's more about clarity, which is one of the things that you know, we've talked about a great bit, whether it's stress testing, some things on slr G, SIB, you know, those are all things that I think play an important role in regulation, you know, in a safe environment, but you know a lot of questions around where they uh too restrictive and you know, countpounding as opposed to kind of catching the bubble from or the balloon from
squeezing out in another direction, I.
Think one of the one of the and the broader economy.
I think there's a lot of regulation that's occurred that we're less familiar with because we're not in that environment. But if you go across the country in many industries, the excitement is around less regulation there. I think it's going to be less about us, quite frankly, and more about for the broader economy.
I wonder how much we keep talking about the dollar as the backdrop here and how much it's been weakening. And I wonder for you, as the head of capital market is the co president of a bank that has America in its name, how much more difficult it is for you to compete globally at a time where there's a real question about US policy, about the dollar and about what the relationship is going to be.
Yeah, it's certainly, you know, it's certainly a topic meaning the dollar. You know, we're a global business, Yes we are. You know, we are Bank of America. We have a dominant position in the US. We've grown our you know, international business, which I didn't highlight what we're talking about areas of growth, but international is a focus for us, not expanding beyond where we are, but just being more
meaningful in the in the regions that we are. And you know, we just look at it and say, we have global capabilities and you know we can, we can transact and you know, where house risk where we need to you know, for clients one of the big I think misunderstandings or or where it's not thought through enough. It's going to take some considerable time for this to occur. You know, we're looking at you know, weakness and dollars ten percent, fifteen percent versus you know, versus its peak.
We're still the largest capital markets to invest in.
And you just have to keep that in mind.
I want to finish by talking about you. Yeah, you've had a pretty ti remit for quite a while.
Yeah.
Are you excited about the prospect of stretching your legs a little bit having a look at other business lines?
Yeah?
I mean, you know, I've been in the market's business thirty five years in different capacity. But I've always had interaction across the firm, whether it's been investment banking or corporate banking or whatever it may be. And I think if you take a look at you know, these areas of where there's Brian talked about organic growth and where we can do it, I think there's there's some considerable opportunity for us to be more consistent in our delivery.
You know, we did it in the markets business. Try I tried to de emphasize Fick versus equities and think about markets and how we how we can deliver for clients. And I just view this as an expansion you know of that and trying to help everybody bring that to fruition because you know, ideas are great, execution is everything.
Does that mean spending less time with these guys, They're going to miss you.
I'm going to miss it. I've said, I'm a trading floor for thirty five years. Yeah, you know, it's a great thing. It's been a great experience. It's given me a lot of opportunity. We have a lot of talented people that you know, as I said in the meeting we had earlier in the week, you know, I know everybody's saying congratulations. Now the next question is what about me, which is for everybody else in the room, what does this mean for me? And you know, we're gonna be
making those decisions over the next couple of weeks. But we're pretty excited about it. Team's pretty excited about it, and response has been very good.
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