By Holden Wilen – Staff Writer, Dallas Business Journal
Don’t be surprised if the Federal Reserve raises interest rates again at its upcoming meeting and don’t expect any cuts this year, according to American National Bank of Texas CEO Robert Hulsey.
“I think the economy is still too strong,” Hulsey, who serves on Federal Reserve Bank of Dallas board, said in a recent interview with the Dallas Business Journal. Hulsey spoke in his personal capacity and not on behalf of the board.
“We don't have fiscal and monetary policy working together, so that disparate action, I think, really creates an environment where I don't expect interest rates to come down in [2023]. I just don't see that at all.”
The Fed has hiked rates 10 times since March 2022 to combat persistent inflation. Those increases came after a period in which the central bank held the benchmark federal funds rate near zero and bought billions of dollars of bonds to stimulate the economy during the pandemic.
Rising interest rates have created challenges for the banking industry by putting pressure on institutions with large securities portfolios. Higher rates have also caused the cost of deposits to increase, eating into banks’ profitability.
After the Fed’s policy-setting committee held rates steady at its meeting in mid-June, all eyes are on the central bank again as officials prepare to make their next decision at another two-day meeting next week. Most economists expect the Fed to implement another hike.
Some critics have opined that the Fed kept rates too low for too long, and Hulsey said he does not necessarily disagree.
Hulsey recalled the talk in 2021 and even early 2022 about how inflation looked to be “transitory.” He said the Fed had a tough job to do. The U.S. had just implemented its biggest stimulus funding packages ever while at the same time there were other issues such as a labor shortage, supply chain challenges and near-zero interest rates.
“If any one in time in an environment you only had one of those four items, you would have said, ‘Oh, that could be inflationary,” Hulsey said. “You had all four of them that are just moving dramatically, and it was like, ‘That's transitory?’ That's just not real.”
“I think there was some strong sense that it would have been better to raise interest rates a little earlier than where we went into it,” he said.
Looking ahead, Hulsey said the only tool the Fed has at its disposal to continue fighting inflation is interest rates, while the main tool lawmakers and the White House have is stimulus. Both of those policies are in conflict with each other and have to work themselves out, he said.
Stimulus programs that provided incentives for projects like new electric vehicle battery factories continue to propel the economy, Hulsey said. However, he worries about what will happen when all of those projects have worked their way through the system.
“I think that’s where the rubber is going to meet the road,” he said.
If, at that time, rates are too higher, there will be an economic slowdown. If not, then there is a possibility of a so-called “soft landing.”
For banks like American National, Hulsey said, high interest rates will continue to be a challenge. In a slowing economy, banks will have less opportunities to lend and make money. In turn, that means they will also have less ability to fund their deposits.
American National benefits from being privately held by local shareholders, Hulsey said. The Terrell-based bank has $5.4 billion assets and $4.5 billion deposits as of March 31. The bank’s loan portfolio totals $2.8 billion, about half of its total assets.
Despite possible upcoming headwinds, Hulsey said he remains confident in the 147-year-old bank’s position because it remains well-capitalized with no problem loans.
“You can have some short-term things that are going to be not so fun to swallow, but you can't be focused on that,” Hulsey said. “You’ve got to sit back and look at where are you going to be three years from now, five years from now?
“I guarantee you, it's one thing I can say about it: We have done everything we can to build this bank to last another 150 years.”