Sometimes, uncertainty is a good thing.
That was one view from Richard K. Davis, the head of U.S. Bank, as he spoke in Montecito on Jan. 11
Davis is the president of the Federal Advisory Council of bankers that consults with the board of governors of the Federal Reserve System. He said he has often told the central bank that announcing that interest rates will be low for a long time is not necessarily the best idea.
“The prior Federal Reserve would always say, ‘rates are what they are,’” Davis said. The Fed announced in September 2012 that it plans to keep rates low until at least mid-2015.
Such an explicit guarantee that the cost of borrowing will be low for years to come has caused businesses and consumers to postpone large purchases, Davis said.
In late 2012, the Fed changed course and said it would keep rates low until the national unemployment rate fell below 6.5 percent.
Davis is the CEO, chairman and president of U.S. Bank, the fifth largest bank in the country. He spoke at a luncheon hosted by the Channel City Club at the Montecito Country Club.
Davis cautioned against over-regulation of the industry, while acknowledging that the new normal for banks is inevitable. “If the punishment is that banks are more like utilities, there will be fewer profits, and fewer investments, which means fewer banks, and I submit to you, fewer entities to make dreams happen,” he said.
Then Davis paused and looked at the audience, which included a table full of bankers from the Santa Barbara branch of U.S. Bank, as well as executives from Montecito Bank & Trust and Santa Barbara Bank & Trust, now part of Union Bank.
“But don’t cry me a river. Just adjust to it.”
He also expressed concern about the size of the Fed’s balance sheet, which has increased from about $800 billion to almost $3 trillion through multiple rounds of quantitative easing. Some economists are concerned that the massive increase in the money supply will lead to soaring inflation when the economy gains momentum.
If the unwinding of that balance sheet isn’t done just so, “inflation has a very real risk of getting out of control,” Davis said, but he also said the Fed’s board of governors is “very confident that [unwinding the balance sheet] will work, but they understand they will have to be very precise.”