Anxiety amongst individuals and families continues to mount due to stubbornly high inflation. But there may be some good news ahead. While the consumer price index (CPI) hit a 40-year high of 9.1% last summer, it has been steadily falling during the past year, according to the U.S. Labor Department.
Of course, consumers are still feeling the pinch, as inflation erodes the purchasing power of money. If left unchecked, high inflation could cause an economic downturn, which is equally as significant for banks as it is for customers. Luckily, banks and other financial institutions look to have the strategies needed to help slow inflation and prevent a recession. If properly applied, these solutions can create economic stability and help stave off an economic collapse.
Here are the three major ways U.S. banks can help tackle inflation.
1. Adjust Interest Rates to Curb Consumer Spending
When inflation is high, banks can increase interest rates to encourage people to save more and spend less. Higher interest rates also make borrowing more expensive, which can dissuade people from taking out loans, further reducing demand and inflation. One of the Federal Reserve’s main tools to fight inflation is raising interest rates, which makes borrowing more expensive and tempers consumer demand. Moreover, higher rates on credit cards, auto loans, and mortgages reduce spending and incentivize saving. When the Fed raises interest rates, which it has done several times this year, banks follow suit by increasing rates on loans and consumer products. This dampens economic activity and helps slow inflation.
2. Promote International Trade to Drive Economic Growth
International trade and investment ultimately help temper inflation domestically. As such, banks can facilitate global commerce by supporting U.S. companies doing business overseas, as well as foreign firms looking to export to North America. Fortunately, some groundwork is already being laid. Case in point: To promote engagement and economic growth in the Asia Pacific region, President Biden has appointed East West Bank Chairman and CEO Dominic Ng to chair the Asia Pacific Economic Cooperation Business Advisory Council. To that end, when trade expands, more goods and services become available, thereby reducing prices and sticker shock. And with rising global cooperation, banks have a larger role to play in driving economic stability through international commerce.
3. Expand Loans and Support for Small Businesses
It’s no secret that small businesses are the backbone of the U.S. economy, employing nearly half of all workers. When banks offer affordable loans and financing options to small businesses, these practices play a key role in revitalizing local communities and creating jobs. Plus, by offering more flexible loan terms, lower interest rates, and temporarily eased lending criteria, banks can help many viable small businesses access the capital needed to withstand higher costs due to inflation. More specifically, prioritizing loans to the resilient manufacturing and energy sectors can stimulate broader economic activity that offsets higher prices. The key, however, is finding ways for banks to expand affordable lending to small businesses during times of inflation, so these companies can grow, create jobs, and fuel productivity.
The Future of the U.S Economy Remains Optimistic
While inflation remains relatively high and a potential recession could pose risks, there are reasons for optimism. The pace of rising prices is slowing with a recent dip in commodity costs and easing supply chain pressures. Unemployment remains near historic lows, consumer spending is holding up relatively well, and businesses continue to invest and grow. Ultimately, banks need to continue to support consumers and businesses through this tumultuous economic period by expanding access to credit at reasonable rates. By doing so, this should help maintain confidence and stability and put the economy back on track toward prosperity.
