Inside a packed hearing room in the state Capitol, scores of bankers and credit union executives gathered last Tuesday to debate a bill the bankers viewed as a threat and the credit union leaders described as a modest boost for their growth.
As the clocked ticked on, committee chairman Dale Kooyenga — a certified public accountant from Brookfield who also serves on the Legislature’s budget-writing committee — would sometimes ask those testifying to remain on point. It was a timely reminder in more ways than one.
While the assembled financial brain power in the fourth-floor hearing room disagreed over Senate Bill 451, they shared an enemy largely unseen since the early 1980s: inflation. It is a growing factor in the lives of all their customers, whether those clients invest assets in a bank or a credit union.
With the annualized inflation rate hitting 7% at the end of 2021, the highest rate since 1982, an economy already troubled by the pandemic, supply-chain troubles, and workforce shortages faces a challenge hardly talked about a year ago. In fact, most economists from the Federal Reserve Bank on down were forecasting only modest, growth-stimulating inflation.
The story is much different today, as economists worry inflation will harm consumers, businesses, retirees, and young workers alike. The Fed has quickly shifted from its “some inflation is healthy” mode to a mix of strategies aimed at slowing price increases over 2022, including the likelihood of increases in core interest rates and a skeptical look at the need for more government stimulus.
“Despite advances in computing power and predictive models, the biggest threats are typically the ones we never see coming,” wrote Nancy Johnshoy, senior vice president for First Business Bank in a recent analysis. Midwest-based First Business Bank has significant holdings in Wisconsin.
“Case in point,” Johnshoy added. “Every year the World Economic Forum asks … thought leaders to rank the biggest risks in the coming year or two. At the start of 2020, infectious disease didn’t make the list and yet COVID-19 became the most disruptive pandemic in a century. At the start of 2021, inflation wasn’t on the list, either, yet it is now the most pressing issue in the U.S. economy.”
For many people, inflation means the pizza slice that cost $1 a few months back costs $1.50 today. Or a used car that cost $5,000 a year ago sells for $7,000 today — even if it comes with higher mileage. Or a retirement check doesn’t stretch as far as it once did.
For the business community, already hard-pressed by workforce and supply issues, inflation erects another barrier to success. That barrier is higher interest rates on money borrowed to expand a business, buy equipment, make repairs, or other things businesses of all sizes do routinely.
Most investors expect three to four interest rate moves this year, all trickling down from Fed strategies designed to control the money supply in gradual ways that taper inflation without sending the economy into recession.
A recent analysis from BMO Harris Bank, one of the largest asset holders in Wisconsin, projected an 80% chance interest rates will begin rising by March, a 97% chance rates will rise by June, and a 100% chance rates will rise by December.
What does that mean for the average business? Business borrowing rates will likely mirror changes in the core federal rate, and deposit rates will likely rise but lag the federal rate.
There is a political component as well. Congress and the White House may consider whether now is the time to throw more money on an already hot fire. The nation’s financial system has already accounted for federal dollars in the pipeline; it will watch with caution any proposed stimulus packages that appear more short-term than long-term in nature.
Inflation hasn’t been a real factor in the U.S. economy since the 1980s, so entire generations don’t recall its corrosive effects. The right steps now will help to avoid a repeat of the worst.
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