JPMorgan Chase CEO Jamie Dimon has warned that many U.S. businesses and investors are ill-prepared for a looming "worst case" scenario in which the Federal Reserve boosts interest rates to an eye-watering 7 percent—while the United States languishes in the grips of stagflation.
He touched on the much-discussed theme of recession, saying "no one knows" whether the United States is in for a so-called soft landing, meaning a cooling of inflation and economic growth without triggering an actual contraction, or whether the nation is prepared for a hard landing.
Faced with decades-high inflation, the Federal Reserve has raised interest rates at its fastest pace since the 1980s.
Since March 2022, the benchmark fed funds rate has jumped to a range of 5.25 percent to 5.5 percent from zero.
The FOMC vote was accompanied by its Summary Economic Projections (SEP), which points to an additional 25 basis point boost this year, which would send rates to a range of 5.50 percent to 5.75 percent.
However, Mr. Dimon thinks that may not be enough, and the Fed could well take rates as high as 7 percent—and "break stuff" in an economic sense, as central bank watchers like to say.
Higher, for LongerFederal Reserve Chair Jerome Powell put a higher-for-longer spin on the path of interest rates, telling a news conference following the FOMC meeting that inflation has a long way to go before reaching the central bank's target of around 2 percent. His remarks sent stocks lower, with higher-for-longer interest rate concerns seeming to weigh on investors into this week.
Mr. Dimon delved into the theme of higher-for-longer interest rates in his interview with Times of India, saying that the early rate increases were basically meaningless—and it's the later ones that have brought pain.
“First of all, interest rates went to zero. Going from zero to 2 percent was almost no increase,” he said. “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.
"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."
Stagflation is a toxic mix of stagnant economic growth (or even recession) and high inflation.
"If they are going to have lower volumes and higher rates, there will be stress in the system," Mr. Dimon continued, of the double-whammy of high borrowing costs plus sluggish business.
"We urge our clients to be prepared for that kind of stress.”
Mr. Dimon then referenced a famous and often-cited quote from legendary investor Warren Buffett.
“Warren Buffett says you find out who's swimming naked when the tide goes out," he said. "That will be the tide going out. These 200 basis points will be more painful than the [jump from] 3 percent to 5 percent.”
Mr. Dimon's warning that businesses and investors aren't prepared for rates to go to 7 percent feeds into a broader concern about a looming recession.
The recessionary drums beat louder last week as a key U.S. economic gauge from the Conference Board dropped for a 17th consecutive month.
'Sugar High'Mr. Dimon said there's a false sense of confidence among some investors about the resilience of the U.S. economy in the face of turbulence caused by high inflation and the policy moves meant to quash it.
“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.”
Concerns that the COVID-19 pandemic would lead to an economic meltdown led to an explosion of deficit spending, which has largely continued in Washington although Mr. Dimon said it "can't continue forever."
Consumer spending, which represents roughly 70 percent of U.S. gross domestic product, posted solid growth in July, the latest month of available data. However, economists widely expect the past year of aggressive Fed interest rate increases to weigh more heavily on domestic demand.
The latest data on retail sales showed that Americans spent more than expected in July, splurging on hobbies, sporting goods, and clothing, prompting economists at Goldman Sachs to raise their third-quarter gross domestic product estimate by seven-tenths of a percentage point to a 2.2 percent annualized rate.
"Expectations for the next six months tumbled back below the recession threshold of 80, reflecting less confidence about future business conditions, job availability, and incomes," said Dana Peterson, chief economist at the Conference Board.While financial markets have, over the summer, largely dismissed recession fears, fresh data suggest that the country may be facing a "stagnation" point.