JPMorgan CEO Jamie Dimon is issuing a stark warning, stating many U.S. businesses and investors are unprepared for the possibility of the Federal Reserve raising interest rates to a staggering 7 percent. It comes while the U.S. confronts stagflation.
Dimon delivered the warning in an interview with the Times of India on September 26 in Mumbai. On the same day, Wall Street’s major indexes fell more than 1 percent as investors grappled with the likelihood of prolonged high interest rates being used to combat high inflation brought on by the infusion of trillions of dollars of federal spending.
Dimon also addressed the impending threat of a recession, recognizing that it is uncertain whether the United States will experience a soft or hard landing.
In response to rising inflation, the Federal Reserve has increased interest rates at a rate not seen since the 1980s. The benchmark Fed Funds rate has increased from zero to a range between 5.25 and 5.5 percent since March 2022. Although the Fed’s policy committee recently voted to maintain interest rates, they cautioned that the fight against inflation is far from over and hinted at possible future rate increases. The accompanying Summary Economic Projections indicated an additional 25 basis point rate hike this year, which could drive rates to 5.5 to 5.75 percent.
Dimon expressed concern that these measures may not be sufficient, speculating that the central bank could raise interest rates to as high as 7 percent, which could cause economic disruption.
“I’m not sure if the world is prepared for 7 percent,” he said.
He also questioned the world’s preparedness for such a contingency, emphasizing the worst-case scenario of 7 percent interest rates combined with stagflation, which is a dangerous combination of stagnant economic growth or recession and high inflation.
Dimon delved into the theme of higher long-term interest rates in his interview with Times of India, saying that the early rate hikes were basically meaningless—and it’s the later ones that brought pain.
“First of all, interest rates went to zero. Going from zero to 2 percent was almost no increase,” he explained. “Going from zero to 5 percent caught some people off guard, but no one would have taken 5 percent out of the realm of possibility,” he said.
“I’m not sure if the world is prepared for 7 percent,” he continued. “I ask people in business, ‘are you prepared for something like 7 percent?’ The worst case is 7 percent with stagflation.”
The CEO cited a well-known Warren Buffett quote, “You find out who’s swimming naked when the tide goes out,” to emphasize the importance of being prepared.
Dimon’s warning is consistent with broader fears of an impending recession. The Conference Board’s leading economic indicator fell for the seventeenth consecutive month, signaling the onset of a c possible recession.
Dimon cautioned against overestimating the resilience of the economy in the face of high inflation and policies designed to mitigate it. He pointed out that the stimulus-driven consumer strength might not be sustainable in the long term.
Although recent data indicated robust consumer spending in July, other indicators suggested stagnation in financial well-being sentiment, with consumers deferring significant purchases out of concern for their ability to save. In August, the Conference Board’s consumer confidence index dropped to a level historically associated with impending recessions.
–Dwight Widaman | Metro Voice and wire services
Photo: Flickr: The Global Financial Context: James Dimon