JPMorgan Chase & Co. (NYSE: JPM ) CEO Jamie Dimon expressed concerns on Tuesday about the potential impact of a worst-case scenario where Federal Reserve benchmark interest rates could reach 7%, paired with stagflation. Speaking to the Times of India, he warned that such a situation could lead to significant stress in the global economy.
Dimon's comments come as market forecasts suggest that the Federal Reserve is nearing the end of its tightening cycle after a series of hikes led to interest rates reaching 5.5%, the highest level in more than two decades. Despite this, US policymakers maintain that rates must stay high for longer to curb inflation. His remarks highlight the potential strain on the economy if rates were to rise from 5% to 7%, which he suggested would be more painful than an increase from 3% to 5%.
The JPMorgan CEO noted that if businesses face lower volumes and higher rates, it could reveal economic vulnerabilities. Referring to a famous quote by Warren Buffett, Dimon said, "Warren Buffett says you find out who is swimming naked when the tide goes out. That will be the tide going out."
Fed Chairman Jerome Powell has stated that future interest decisions will be influenced by incoming economic data. Recent indicators point towards a slowdown in inflation and stability in the labor market. However, US inflation remains above the Fed's 2% annual target rate, with prices increasing in August due to higher energy costs.
Economists have estimated a 60% probability of a US recession occurring within the next year, a prediction more optimistic than Bloomberg Economics' forecast of an impending slump within this year. A rate hike to 7% could also dampen recent optimism among Fed officials about their ability to engineer a soft landing for the economy, given the current low unemployment rate of 3.8% and signs of easing prices.
Dimon ended his remarks with a cautionary note: “Going from zero to 2% was almost no increase. Going from zero to 5% caught some people off guard, but no one would have taken 5% out of the realm of possibility. I am not sure if the world is prepared for 7%.”
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