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Influencers with Andy Serwer: Catherine Keating

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On an all new episode of Influencers, Yahoo Finance Editor-in-Chief Andy Serwer sits down with BNY Mellon Wealth Management CEO Catherine Keating to discuss everything from inflation and interest rates to voting rights and the COVID-19 pandemic.

Video Transcript

ANDY SERWER: The long awaited economic rebound may finally be here. But that doesn't promise good times for the stock market and could mean the opposite. Katherine Keating knows what to expect because she's seen it all. She's the CEO of BNY Mellon, an iconic bank more than two centuries old that manages $2.2 trillion in assets. Before that, she spent nearly two decades climbing the ranks at JP Morgan, helping the bank weather the Great Recession.

In 2014, she jumped to the nonprofit Commonfund, a leading asset manager for endowments and foundations which she ran until joining BNY Mellon three years ago.

In this episode of "Influencers", Catherine joins me to talk about how investors should navigate the recovery, what's next for the rise of the retail investor, and why corporate America has picked a fight over voting laws.

Hello, everyone. And welcome to "Influencers". I'm Andy Serwer. And welcome to our guest Catherine Keating, the CEO of BNY Mellon Wealth Management. Catherine, nice to see you.

CATHERINE KEATING: Nice to see you too, Andy.

ANDY SERWER: So there is a lot of optimism right now about the economic recovery. Do you share that optimism?

CATHERINE KEATING: I do share the optimism. We look at the larger financial ecosystem that we all invest in, which of course is the global economy. And if you look at this country, we've got stimulus that's extraordinary. 85% of the households in this country received some sort of stimulus, roughly a quarter of the GDP being supporting the economy. So I think that's very strong.

And our economy is made up of consumers. And when you look at consumer balance sheets, they have continued to get stronger and stronger since the financial crisis which is not to say there's not a lot of distress out there. There certainly is. But in the aggregate, there's an enormous amount of stimulus trying to help the economy, and actually higher savings today than we had going into this. So those are all very, very strong positives for the recovery of the economy. And then of course, we've got the optimism of vaccines and reopening. So yes. We do share the optimism.

ANDY SERWER: Right. There are still some risks though. What are those? And how do you feel about them?

CATHERINE KEATING: Well, I mean, obviously we are still in the middle of a global pandemic. And so we worry very much about health and financial health. But also there is more stimulus than we've ever seen before. And we all have a new vocabulary that we've developed through this pandemic, new words work from home, or jabs. Well, one of those new words is the one that Chairman Powell uses all the time, which is transitory. Because inflation and the needing to raise interest rates is often what ends an economic expansion cycle.

And so we all expect to see inflation rising. Actually the data yesterday told us it is rising, and maybe even a little more than we expected. But we would join Chairman Powell and say, we do think it's going to be transitory, that we'll see it this year as we rebound from the lows of last year. But that then it will begin to abate. And we think it'll abate for a couple of reasons. One is demographics. And this is not new to the pandemic. The world's aging. The major economies of the world, whether it's the US, Europe, China, Japan, all aging.

And aging economies tend to be a bit deflationary. There are other reasons. Debt tends to be a bit deflationary. You have more public debt. Think of your own household. If you have a lot of debt and you're paying off debt, you're not investing for other things. So there's more public debt. There's actually more private debt than there was because of the low interest rate environment that we've had over the last decade. So we think there are some things that could be a bit deflationary going forward.

And so we are in the camp. We do agree with Chairman Powell that we will see inflation. But it'll be transitory.

ANDY SERWER: Yeah. And some even say muted. Obviously, technology is another deflationary force in the economy as well. I want to ask you about the connection and disconnection between the economy and markets, a timeless question of course. But it kind of came to the fore last year when the economy was doing badly, the market went up. There a whole lot of reasons for that. But what are you thinking right now? There are some that say, for instance, that the recovery's already priced into the markets. Obviously, equities are fairly pricey.

CATHERINE KEATING: So you're right. There is a disconnect between the economy and the markets. And for a couple of reasons. One, they measure different things. And two, they measure different time frames. So think about the market. The market is forward looking. You're buying based on the expectations you have for returns and earnings going forward. So if we look at last year, the market was forward looking. It was anticipating that there would be a recovery. We did see the market lead the economy. And we saw equity prices go up.

And to your point about what's priced in, equity prices went up last year. But that was all an expansion of PE multiples. It wasn't because earnings went up. Earnings were down across corporate America last year. So there's a lot that's priced into the market. You're correct. And we're looking right now very closely as we come into earnings season to see are earnings going to live up to that promise. Because to really see the equity market continue to rise consistently, you want to see earnings rising. You want to see earnings rising.

ANDY SERWER: And we've seen some financial services companies already reporting this week. I'll get back to that. But I want to ask you another huge market theme question that's on everyone's mind, which is the rotation between cyclicals and techs. And that has been this great sort of tug of war, or mental tug of war, this year. Where do you come out on that?

CATHERINE KEATING: So we think that that's not atypical when you're coming out of recession and going into an expansionary environment. You do tend to see some stocks lead and some stocks lag. And when you really get a robust market environment, it's when there's more participation. And that's exactly what we've seen. So last year, you saw technology and the communication services companies, and that large cap begin to lead. But then you've seen small cap, and mid-cap, and global stocks start to catch up.

And so we actually think that's a very good-- broad markets are good and sustainable. And so we think that's a really positive thing.

ANDY SERWER: I want to go back to inflation for a minute because Chair Powell said on "60 Minutes" I think it was just last week that the US economy is at an inflection point. But the fed plans to keep rates low until 2023. What's your take on that and also your assessment of Chair Powell overall?

CATHERINE KEATING: Look, we think that our policymakers, whether it's the Federal Reserve, or Congress, the Treasury, have really done a great job for us as a country. And we would agree with Chairman Powell that I think we are at an inflection point for the economy with vaccines, and reopening. I think we all feel it. We see it in our neighborhoods. I see it here in New York City, which is very exciting.

So if you ask me, what are we really focused on as we try to assess the prospects for investors going forward, what we're really focused on number one first and foremost is interest rates. And people think that interest rates are important to the bond market, which is true, which is true. They definitely impact the bond market. But interest rates impact all the capital markets. They impact the equity market. Either interest rates will raise or lower your cost of financing as a company.

They will raise or lower the discount rate that we all use as we assess forward earnings. They impact private equity markets. The ability to buy a company, how much does that cost? They impact real estate markets and returns. So we are very, very focused on interest rates. And we do expect we've seen obviously the low interest rates anchored, thank you to Chairman Powell, at a very low level. But as you see, as you go out the curve mid-term and longer term interest rates have been rising. And we do expect to continue to see that but in a modest and relatively benign way.

If the 10 year crosses into 2%, 2 and 1/2%, maybe even close to 3%, we don't think that necessarily stands in the way of stocks continuing to grow.

ANDY SERWER: I want to switch over and ask you a little bit about some proposals coming out of the White House, Catherine. President Biden is pushing for a $2 trillion infrastructure bill. Is that the right thing for the economy now?

CATHERINE KEATING: Well, I think the right thing-- it's the right thing for the country to invest in the aging infrastructure that we have. And we think if that is done well, that will be a great boost to the economy. But I think it poses a sort of larger question about 2022 more broadly. Because the thing about infrastructure spending is it takes time. It takes time. We're not going to fix our roads, and bridges, and tunnels, and things like that instantaneously.

So if we look forward to next year and we compare it to this year, we're going to have the impact of stimulus waning. This extraordinary stimulus that we've had will begin to wane. It will take time for infrastructure to create jobs. It certainly will. But it just doesn't happen overnight. And we think about the potential impact of higher tax rates impacting companies and individuals. And so we're watching carefully to see the policies coming out of Washington as Congress gets back to work this year.

ANDY SERWER: Another proposal coming from the White House is a corporate tax hike that would raise the rate from 21% to 28%. And then there is the question of the effective rate of course that corporations pay. Do we need reform there?

CATHERINE KEATING: Well, obviously, our policymakers think that we need reform not just here in the US, but globally. As you know, Treasury Secretary Yellen has made a proposal for really global multinationals. And I think we want our financial system to be fair and inclusive to all. And so I think a focus on the corporate tax rate is important. Corporate America matters a lot to us. And I think that's important. But I think balance in all things tends to be the right policy.

And so if you think about 28%, what would that do? It would basically roll back the tax cuts of the Trump administration. Where do we think we come out? Probably somewhere in between. Probably somewhere in between. Maybe it's 25%, something like that.

ANDY SERWER: Right. And you mentioned the global minimum tax, I guess. The 20%. That's also on the table as well, right?

CATHERINE KEATING: Yes.

ANDY SERWER: Let me ask you a little bit about BNY Mellon. The stock is up 34% over the past year. Seems like you did a pretty good job of weathering COVID. How did you do it?

CATHERINE KEATING: So it's interesting. I've been around through a number of cycles as you have. And one of the things I thought wrongly was that I'd pretty much learned everything there was to learn. I'd been through the financial crisis, I'd been through the 2000 tech bubble bursting, and 9/11. And what I learned as a leader is none of us have learned everything. Because here we were going through a global health crisis, something that we'd never done before, and the only way-- And we had to do it separately. We were doing it together but separately.

And so what did we learn? We learned number one, priorities really matter. You have to set very clear priorities for your company. Our CEO Todd Gibbons set priorities. Number one, health and safety of employees. Number two, service to our clients. Number three, supporting the financial system in our communities. And we did that. And it kept people together, and kept them focused, and kept them delivering through what were really some of the most challenging and volatile markets we've ever seen.

ANDY SERWER: Catherine, how did customers change the way they banked or invested with your firm during COVID.

CATHERINE KEATING: So that's a really great question. And I would say it was in a couple of ways. We survey-- we obviously talk to our clients every day. But we survey them every year. And we surveyed them at the end of December last year. And one of the notable things that came out of that survey was a much stronger interest in responsible investing, environmental social governance concerns. And we actually think that's because of a few things. Right? Number one is if I really think about my career, when I started, most people in corporate America retired with a pension plan. Right?

And that was something that they didn't invest themselves. There was a chief investment officer, a chief financial officer investing that pool of capital for them. And then they got their annuity for the rest of their lives. Well today, we're responsible for saving for our own financial futures and our retirement. So people have more capital. They have their 401(k)s they can direct, their IRAs, their personal savings. So I think that was one reason.

Another reason is that people are learning more about responsible investing. We have 30 years of data now that tells us that investing with responsible principles doesn't necessarily mean you have lower returns. In fact, they could be comparable to traditional portfolios. They might even be better. And the last one, I think we can't discount what we've all lived through. We've lived through a global health crisis that's made us all think about what's important in our lives. And I think clients are looking at that too.

And they're saying, yes I want to have strong financial returns. But I also want them to be consistent with my values and my non-financial goals. And so that's one area that we've seen clients change.

ANDY SERWER: I mentioned earlier that some financial services firms have reported like GS and JPM, and they were pretty strong numbers. You guys are putting your earnings out soon. Why in general do you think the banks are doing pretty well right now?

CATHERINE KEATING: Look, banks are exposed to the economy. And so you saw a real downturn last year. As the economy went down, you saw banks taking reserves, and potential for loan loss provisions. And now you see banks reflecting the economy again. Turns out they didn't have as many loan losses as they might have thought. It turns out that as the economy is reopening, there's been a lot of transaction volume. And so you're really seeing banks reflect the economy.

ANDY SERWER: Another thing happening this week, Catherine, this big direct listing by Coinbase. And I'm wondering if you've given any thought to cryptocurrency and the future of financial services.

CATHERINE KEATING: Well, we obviously have given a thought to cryptocurrency and the future financial services having been around for 237 years at Bank of New York Mellon, and survived, and thrived through all the changes in the financial system. And the way we think about it is we start with the technology blockchain, which is really a system of ledgers and transactions, which obviously is what the financial industry depends on, ledgers, transactions to execute investments.

And so we think about it a couple ways. One, you mentioned cryptocurrency. Obviously, we are very focused on cryptocurrency. You've seen us make an announcement that we have a pilot about custody and cryptocurrency. There are private cryptocurrencies. But eventually, there will be public ones as the dollar, and the wan, and others digitize.

You've also seen us focus on financial assets, mutual funds, ETFs, those sorts of things. You've seen an announcement that we're going to be partnering with an ETF in the crypto space. So we have a digital assets group here. We're highly focused on it. And I guess the way we think about it is take yourself back 25 years or so to the internet. That was a new ecosystem too. And it wasn't readily accessible to everybody in the beginning. It was really scientists and government.

And it wasn't really trusted by everybody yet. We kind of look at blockchain as a new financial ecosystem. And it needs accessibility. And it needs trusted partners. And we want to play that role.

ANDY SERWER: Shifting gears here a little bit, Catherine, what are your plans for working from the office this year? Would you be offering incentives for people to come back? What is your timetable? How are you thinking about that?

CATHERINE KEATING: Yeah. So we've said that we will begin bringing our employees back to the office in September. In September. And on any given day now, we might have somewhere between 10% and 15% of our employees in different offices around the world. And so we will bring-- health and safety of our employees is our number one priority. We will bring them back in a way that we think is healthy and safe for everybody. But one of the other things that we've learned about the way we work in this pandemic is that we can be more flexible.

When we went into the pandemic, we had about 2% of our employees who did not work in offices. And within a space of weeks, we had to transition over 90% of them. And so we've learned that we can be more flexible. And I think that's a great thing. So what you will see is you'll see a smaller number of employees who have to be in the office all the time. And by the way, we're a regulated industry. And there are some roles that really are best done in office.

You'll see another percentage of employees where maybe their roles can be remote permanently. And then you'll see a large group that's in the middle where sometimes you're in and sometimes you're out. And the truth is we've always been that way. It's just that we've been that way for travel. Business trips, things like that. So I think that one of the positive outcomings of this pandemic is it's going to be a more flexible work environment. And I can date myself. And I will.

I always say 1999 changed my life. And people say, well, why did 1999 change your life? Was it Y2K? I said, no, no, no. The BlackBerry came out. The BlackBerry came out. And I had two little ones at home. And it was the very first time that I could read my email at home and also be at home with my children, connect to the office.

So we've now learned that we can do a lot more than read our email at home. We can do trades, and transactions, and all sorts of things. Actually, we can keep the financial system going, which is part of what we do in financial services. And so we're going to be a more flexible workplace. And that's going to be really positive for everybody.

ANDY SERWER: I remember those Blackberry days well, Catherine. And you're right about being able to do pretty much everything at home. For better or for worse you could also add. But the balance is critical. I want to ask you about the rise of retail investors this year with GameStop, and Reddit, and Robinhood, and ask you, how does that impact your thinking as an institutional investor?

CATHERINE KEATING: So that's also an excellent question. And maybe stepping back a little bit and thinking about how the market has evolved over my career, over your career, when we started our careers, the institutional investment market in this country was much larger than the retail market. Today, that's no longer the case. The retail market is much larger. And it's growing a lot faster. And so that has really changed market structure.

And the way we look at it here is if 20 years ago you had that chief financial officer, and you had that chief investment officer managing your pension plan for you, managing your savings, today we're all responsible for doing it ourselves.

And so what we try to do here is bring all the institutional disciplines that that CIO or CFO might have had. And we try to port them over into wealth management so that we can deliver those same kind of institutional returns. And one of the things that institutions do really, really, really well is that they set a long term plan, and they stick with it. And that means that they tend to be countercyclical. So what do they do when the market goes down? They actually buy equity. They rebalance.

And we're all emotional beings. We feel the pain of loss. We feel the euphoria of gain. And for individuals, it can be really hard to do that. And we have to look no further than last year and fund flows. Because we can track mutual fund flows, ETF flows, and we track them all the time to see what is the retail investor doing. And what the retail investor did last year was the retail investor generally didn't buy equity. All the net fund plus last year went into fixed income and cash.

Now that's reversing this year. We're seeing fund flows coming back into equity. But what that means is the retail investor may have missed a lot of that upswing that happened as the market rebounded so quickly. And markets do always rebound quickly. So we're very proud of the fact that in March, we did a call on a Monday. I'll never forget it. 4 o'clock, we had a couple thousand clients on the call. And our investment team told our clients, you should rebalance. You should rebalance.

We think now, we think that 12 to 18 months from now, you will be happier to be a buyer of equity than a seller of equity. And that's what we did. And so it means that our clients were really able to participate in this rapid rebound.

ANDY SERWER: And that was March 2020.

CATHERINE KEATING: March of 2020. Correct. Last year. Correct. Last year. That's when.

ANDY SERWER: Yeah, last year.

CATHERINE KEATING: Yeah.

ANDY SERWER: You are one of the few women CEOs in banking. And you've also succeeded in getting 40% of the leadership at BNY made up of women. How have you achieved that? And what lessons can be applied across the business world?

CATHERINE KEATING: Well, we talked about the fact, Andy, that we share a hometown, Washington DC. And I think it was Marian Wright Edelman who very famously said, if you see it, you can be it. And when I was growing up in DC, I didn't see finance as a career. I really didn't. I come from a family of public servants. And I saw media, and journalism, print, and broadcast of course in DC. I saw education, and healthcare, and a lot of great careers. But I didn't know anybody in the financial services industry. So it didn't occur to me to go into it.

I learned about it. Instead, I went to law school. My dad was a lawyer. And my clients were asset managers. And so that's how I learned about the industry and realized that I just-- I love markets. I love the stimulation of markets that challenge you every day. But I also love forming long term relationships with clients. And that's really what we do in this industry. So one of the things that we try to do is make the industry as visible to everybody as we can, as visible as we-- in fact, today is part of that, making this visible to even more people.

Because it's a great industry. And it's a great career. And we will be better, and better, and better the more people that we invite into it and the more diverse our teams and perspectives are. So we're hugely committed to that here.

ANDY SERWER: Yeah. COVID-19 disproportionately hurt women in the workplace. Are there things that both the public and private sector can do there?

CATHERINE KEATING: Well, look. I think first and foremost, flexibility is good for everybody. Just having a more flexible work environment is good for everybody, men and women. So we will all benefit from that. But apart from that, having a package of good employee benefits really matters. Having health insurance that's able to accommodate the needs of COVID, having leave policies, good parental leave, which we've expanded recently, good caregiver leave, which we've added recently to help all of our employees as they cope with what has really, really been a difficult year plus for all of us.

ANDY SERWER: I want to ask you what may be the most tricky, complicated, difficult question for any CEO or corporate executive. And that is weighing in on voting rights laws. It's almost thankless. I looked at what happened with Coke and Delta. And they managed to get both people on the left and people on the right boycotting them, which is just very-- again, it's a difficult path to navigate. How do you guys think about that at your institution?

CATHERINE KEATING: So look, we represent the economy. We represent the economy. And so we want to have an open, and working, and successful economy. And that's really the way that we think about it. We think that democracy is important. We think it's one of our greatest strengths. We want as many people to be included in it as possible. Because we think it's going to be good for the economy and good for everybody. And that's really the way we think about it.

ANDY SERWER: You worked at JP Morgan for almost two decades I think including during the Great Recession I believe. And what did you learn from that crisis? And did you draw on that at all last year?

CATHERINE KEATING: So I think all of us learned some indelible lessons in the financial crisis. And one of the things that I learned was, and I will never forget, is, what's the combination of things that might actually mean that a company is not resilient enough to survive? Because sadly, we did see companies that didn't survive in the financial crisis.

And I learned that it was really kind of a combination of a few things. One was having a very concentrated business model. Maybe your business model was highly concentrated in mortgages, which is where the crisis emanated from. Another one was having a lot of leverage in your business model, being a heavy borrower. You always have to be able to fund yourself. And the third one was liquidity, liquidity, liquidity.

You always need liquidity in a crisis. Even last year, which was not a crisis of the same length as the financial crisis, you saw clients reaching for liquidity, pulling money out of money market funds for example. So what I learned from that is-- and these are great principles for investors. Diversification really matters, whether it's your business model or your portfolio. Borrow prudently. Don't have too much leverage. And always make sure you're liquid enough. And those lessons will stay with me forever.

ANDY SERWER: Before you came over to BNY, you worked in a non-profit called the common fund that manages money for foundations and endowments. Is that different from what you do now? And how is that the same or different I should ask, I guess?

CATHERINE KEATING: So something that drew me to the Commonfund was the nonprofit community has been very, very important in my life. My dad died very suddenly when he was 35. My mom was 32. I was the oldest of the kids. And I'm very lucky because my mom ultimately remarried. So I've had the good fortune of having two fathers in my life. But for a while, she was a single mom. And it was really the nonprofit community that kind of supported us, the Boy Scouts and Girl Scout troops, the school we went to, the college I went to that was generous enough to pay for everything.

And so I see how the nonprofit community can really impact lives. And it drew me to my work at Commonfund, but it also drew me to my work here. Because here I have the great privilege of working with individuals and families, but also with institutions. Family businesses, non-profit community schools, hospitals, museums, all that sort of thing.

And I think the difference is nonprofits are institutional investors. So what does that mean? It means they have boards, and committees, and governance, and investment policy statements. And they're very thoughtful. And again, in a crisis, what do they do? They revert to their policy, they rebalance their portfolios. That's not something that every individual investor has to do. But it's something we think they should do. And that's exactly what we try to bring into our work here. Bring those institutional processes right in.

ANDY SERWER: Right. I mean, you kind of kept your feet in both nonprofit and the for profit world. Does that help your thinking in both places?

CATHERINE KEATING: Well, it actually does because our clients, our individual clients, are nonprofit donors. And so we're helping them thinking about gifting strategies, that sort of thing. And yet the nonprofit community has made such an enormous difference over the last year. Our hospitals, our educational institutions. And so it really is sort of a privilege to be able to link the both and live them both every single day.

ANDY SERWER: And last question, Catherine, what do you want your legacy to be? Have you given that any thought?

CATHERINE KEATING: I guess I'm like everybody else, which is I hope that when I end my career, I will look back and say that I made a difference, that I made a difference, that the work that I did makes a difference. And I think working at a great financial institution makes a difference. Having a strong financial system, having a strong investment partner, just makes a difference in people's lives. It helps to make sure that they're secure in their retirements, that they can accomplish their goals over time.

And so I hope that my work makes a difference in the financial system and in people's lives. And if it does, I will feel that I've been very successful.

[MUSIC PLAYING]

ANDY SERWER: Catherine Keating, CEO of BNY Mellon Wealth Management. Thank you so much for your time.

CATHERINE KEATING: Thanks, Andy. Great to be here.