Wall Street was spooked last week when the Federal Reserve said it would keep interest rates higher for longer than previously anticipated—but according to JPMorgan boss Jamie Dimon, the world is still unprepared for the potential “stress” on the horizon.
In an interview with the Times of India published on Tuesday, the CEO of America’s largest bank said that while he “hopes and prays there is a soft landing” for the U.S. economy, an uncertain macroeconomic backdrop and a deepening government deficit means “no one knows” where America is headed.
“I would be cautious,” he said. “I think we are feeling pretty good because of all the monetary and fiscal stimulus, but it may be a little more of a sugar high.”
He added that deficits “can’t continue forever,” and as policymakers continued to face this alongside an array of other serious issues—including the war in Ukraine and volatility in oil and gas markets—interest rates may need to go up even more than anticipated.
Last Wednesday, the Fed finally paused its monetary tightening spree, but officials indicated they would hike rates once more before the end of the year and that there would likely be fewer cuts than previously expected in 2024.
High inflation
While inflation has cooled off massively over the course of this year, it still remains well above the Fed’s 2% target, with the latest reading coming in at 3.7%. The central bank held its benchmark interest rate at 5.25% to 5.5% in Wednesday’s decision—a level last seen just before the 2007 housing market crash—as policymakers said they “remain highly attentive to inflation risks.”
Dimon told the Times of India in Tuesday’s interview that many businesses and investors were under prepared for a worst-case scenario in which interest rates hit 7% while stagflation grips America.
“First of all, interest rates went to zero. Going from zero to 2% was almost no increase,” he explained. “Going from zero to 5% caught some people off guard, but no one would have taken 5% out of the realm of possibility. I'm not sure if the world is prepared for 7%. I ask people in business, ‘are you prepared for something like 7%?’”
This scenario, he said, would create stress in financial markets.
“We urge our clients to be prepared for that kind of stress,” he said. “Warren Buffett says you find out who's swimming naked when the tide goes out. That will be the tide going out. These 200 basis points will be more painful than the [jump from] 3% to 5%.”
Dimon isn’t the only market watcher preparing for potential difficulty when it comes to the U.S. economy.
Over the summer, Deutsche Bank economists put the odds of a U.S. recession “near 100%,” and warned that “avoiding a hard landing would be historically unprecedented.”
Meanwhile, Bank of America said last week that investors were dumping stocks at the fastest pace since the end of 2022 amid concern that higher-for-longer rates would raise the risk of a U.S. recession.
