Associated Bank Thought Leadership Podcast

WGN: We're on with Steve Zandpour, director of consumer and business banking at Associated Bank. Steve, welcome back.

Steve Zandpour: Thanks for having me back, Steve. Good to see you.

WGN: I want to focus our conversation a little bit on interest rates and inflation today. A couple of stories that are out in the last day or so. One of them just within the last day or so, the Fed president in Saint Louis is starting to be a little concerned that they may be moving too quickly on lowering interest rates and is suggesting maybe a slower or even a pause of interest rate cuts. And then there's another Fed Governor Waller, who is leaning toward a December cut, but he's also worried about inflation. What has these two Fed officials worried?

SZ: Yeah, I think one is just the overall consensus, right? I think we're looking roughly 50/50. Just across what we're seeing from the standpoint of our rates going to get cut in December. It's really kind of up in the air right now. I think some of the conversations around the incoming president and some of his plans around potential tariffs or tax cuts have people a little anxious as well. So there's a lot of just, you know, this notion of what is going to happen. And so I think whenever you hear the “what is going to happen?” that creates pause in the environment. I think that's what we're seeing from these two Fed chairs right now is just, you know, kind of what's next.

WGN: Yeah, because the news on inflation has been pretty good recently. I’m looking at some numbers here, I think October, November, we saw or at least October, the inflation gauge was about 2.3%. But if you put the food and energy cost in there, it jumps up to about 2.8%. And the Fed target, of course, is 2%. I mean, there's some concern, I think, too, about just prices that are still stubbornly high for some of those core items. Right?

SZ: For sure. It's funny, as we talk to our business customers, there is this notion around what can you pass on? What can you not pass on? What's acceptable? And do prices need to either pull back? And so I do think at least what we're hearing from our business clients is there is an inflection point right now of can the prices stay sustainably high as they've been. Historically it's been because we're passing along costs or things have gotten more expensive. But as we see a pullback—you know, you're starting to see some of that right now with direct-to-consumer but believe there's been a pullback in some of the prices that we're seeing from most of our clients. But that business-to-business number hasn't necessarily come down yet, and so that's going to keep things high until there's an inflection point in those two kinds of buckets, because there's some pull-and-pull right there.

WGN: The Fed lowered rates by a half point in September, a quarter point then, I think, in October. And what we're thinking, what, another quarter percent in December?

SZ: That's the 50/50 consensus is it will be a quarter or zero. I think there's very little very little sentiment around it being higher than a quarter at this point.

WGN: What do the jobs numbers have to do, you think, moving forward with interest rates? We had a pretty sizable drop in jobs in October. I think part of that was due to the hurricanes and storms and stuff. The ADP report, which is out this week, has about 158,000 private sector jobs. When do the jobs numbers start impacting what the Fed does?

SZ: Yeah, I think right now, like those leading indicators, although some are seasonally inflated or deflated, depending on whether you're looking at seasonal hiring that's going to be coming up, or the hurricanes, like you mentioned, that caused a little bit of a pullback. But so far, that number has stayed fairly consistent and strong, which I think gives them more ammunition to potentially continue the rate cut in December. But again, like I said, a lot of the conversation, at least that I'm hearing, around the potential tariff increases and the potential cuts of taxes, which would both drive potentially inflation higher, is some of the thoughts, are what I think is giving the big pause on do you do it now or do you wait and see. That's kind of been, you know, right on the fence there. 

WGN: Yeah. Let's talk a little bit about those tariffs are Goldman Sachs estimates that if the Trump administration, incoming Trump administration moves forward with the proposed tariffs that he's already talked about, I think that would be a 25% increase for Canada and Mexico, an additional 10% for China, that we would see inflation go up by nearly 1%. I know there are a couple of other estimates that have near that number or a little bit above. Talk to us a little bit more about the tariffs.

SZ: Yeah, I think, you know, my hope is I feel like we've seen this in the past with his kind of presidency. There's a little bit of it is hopefully posturing to make a point and to potentially get to a deal before we have to get to that portion of the tariff increases. I think the 25% on Canada and Mexico is to potentially drive other parts of his agenda and using that as a leverage point. And, you know, the 10% on China would have a much smaller impact from that 1%. And so if it boils down or breaks that way, I think you've got a lot less volatility than you do with the kind of overall picture that he paints today, you know?

WGN: Yeah, I was just going to add that I saw I don't know, maybe you have better insight on this with your ties to local companies, that companies across the country have already started preparing for the tariffs scenario by pre-ordering items now at the current cost. Some of them are pretty concerned that this might impact their bottom line. Are you hearing the same from local companies?

SZ: You know, we are. I think some of that is normal—taking advantage of year-end cash flows to be able to purchase inventory in anticipation of either what's to come in the holiday or busy season in kind of Q2 as most companies get a little higher ramp-up after, you know, kind of that holiday first quarter seasonal lift. So we do normally see a little bit of an increase in the inventory holdings and the ordering. But there is definitely this notion around, if I have free cash flow now, which we see in both the data numbers and in our clients, that that's a good percentage of the population in the businesses right now and they are taking advantage of potentially hedging anything that might come in the future from someone new tariffs.

WGN: You mentioned earlier you were talking about what companies consider when they pass along your price increases to customers. And a really good example of that is one local company that's really a global company and that McDonald's has learned the hard way about raising prices. They had quite a few people drop off of their customer list when they started raising the cost of a Big Mac. I mean, there is some concern there and some danger if you raise prices too much.

SZ: That's right. And I think that's been echoed in the clients we're seeing. Right. And I think if you think about it from a big business like McDonald's is a great example, right? Like they have access to tons of data and tons of analyses, and they still had to do a pull- back, right? Now you think about the small businesses across America today trying to make that same financial decision. It's tough to gauge, right? And I think there is, as we learned in this example, there is a saturation point of what people are willing to pay for a certain product or service. And it's not infinity, right? So even if prices go up, I think mentally there are products across every spectrum, and we're seeing this with our small business owners, you know, as they—especially in the business-to-business space—there's when you have X widget, you know, people are accustomed to paying this price, and in their mind they kind of have a hard price that they're not going to exceed. And so I think we saw that with the Big Mac is a great example. But this carries through to many small businesses across the U.S. today. And the and the challenges they're facing are what is that exact breaking point where, you know, you can't go higher.

WGN: What are the local businesses telling you about their optimism or pessimism for the new year coming?

SZ: Quite honestly, there's a lot of optimism in that they're kind of, that the Fed is on the right path. I think people feel comfortable with that. I think people feel comfortable around some of the changes on the incoming agenda to make it more business-friendly, to keep the economy moving in the right direction, to protect American businesses. And, you know, we're hearing from our business owners that they feel bullish on, you know, 2025 around their continued success and growth.

WGN: Steve, great conversation. How can people get ahold of you and have a one-on-one if they want?

SZ: Always. Steven.Zampour@AssociatedBank.com. We have a lot of seasoned professionals that are helping navigate these challenges today for businesses across all of our footprint. And as always, we welcome people reaching out and we're happy to assist.