JPMorgan Chase & Co. CEO Jamie Dimon has expressed his concern about the possibility of the Federal Reserve raising its benchmark interest rate to 7% in a worst-case scenario, along with the risk of stagflation, a combination of high inflation and low economic growth.
Fed rates at 5.5%, but could go higher
In an interview with the Times of India, Dimon said that the world may not be prepared for such a drastic increase in interest rates, which could have serious implications for businesses and consumers. He said that the difference between 5% and 7% would be more painful for the economy than going from 3% to 5% was.
The Fed has lifted its key rate to 5.5%, the highest level in 22 years, after 5.25 percentage points of hikes since 2020. The central bank has signaled that rates will need to stay higher for longer to contain inflation, which has surged to a 13-year high of 5.4% in August. However, money markets are pricing in cuts from next year, as the consensus view is that the Fed is approaching the end of its tightening cycle.
Dimon, however, has a more hawkish outlook than his own economists, who expect only one more rate hike this year. He said that he thinks rates are probably going to go higher than 5%, as there is a lot of underlying inflation that won’t go away quickly.
Stagflation could be the worst outcome
Dimon also warned of the risk of stagflation, a scenario that has not been seen since the 1970s, when the US economy faced high inflation, low growth, and high unemployment. He said that stagflation would be the worst outcome, as it would create stress in the system and expose the vulnerabilities of some businesses and consumers.
“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,” Dimon said. “I am not sure if the world is prepared for 7%.”
He advised his clients to be prepared for such a situation, and said that he does not want a system where no bank ever fails. He said that the problem of interest rate exposure was known to everyone, and that social media and online banking did not cause any issues during the great financial crisis of 2008.
India added to JPMorgan’s bond index
Dimon was speaking to the newspaper after JPMorgan’s decision to add India to its emerging-market government bond index, a move that could attract billions of dollars of foreign inflows into the country’s debt market. He said that it was a very good thing for India to be part of the index, as it has other ramifications and implications about transparency and the country’s growth. He said that it would help equity flows into India as well.
He also praised India’s handling of the Covid-19 pandemic, and said that the country has done a remarkable job of vaccinating its population. He said that he is optimistic about India’s future, and that JPMorgan is committed to investing and expanding in the country.