(Bloomberg) — Markets may be anticipating the end of the Federal Reserve’s tightening cycle, but Jamie Dimon is still telling clients to prepare for a worst-case scenario with 7% interest rates and stagnant inflation.
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“We urge our clients to be prepared for that kind of stress,” JPMorgan Chase & Co. said. The CEO told The Times of India in an interview that a hard landing is a risk to the US economy.
His comments were at odds with the consensus after the 5.25 percent hike that pushed the benchmark rate to 5.5% — the highest level in 22 years. U.S. policymakers have signaled that rates will need to remain high for longer to curb inflation, although money markets are pricing in cuts starting next year.
A poll of economists by Bloomberg last week predicted 6% by the end of 2023.
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“If they have lower volumes and higher rates, there will be pressure on the system,” Dimon said while in Mumbai for a JP Morgan investor summit. “Warren Buffett says you have to find out who’s swimming naked when the tide goes out. That’s the tide.”
Dimon said rates would need to rise further to fight inflation, saying the difference between 5% and 7% would be more painful for the economy than going from 3% to 5%.
The U.S. dollar extended its gains on Tuesday, tracking 10-year Treasury yields — driven in part by hawkish Fedspeak and Dimon’s warning, according to Christopher Wong, FX strategist at Singapore-based Overseas-China Banking.
If the key rate rises to 7%, it will have serious implications for American businesses and consumers. Already, economists have put the probability of a U.S. recession in the next 12 months at 55% — and that’s more optimistic than Bloomberg Economics predicts a recession as soon as this year.
The 7% rate will fuel recent optimism among Fed officials about their ability to create a soft landing in the economy, with the unemployment rate still at an all-time low of 3.8% and signs of easing prices.
“Going from zero to 2% is 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 don’t know if the world is ready for 7%.”
In a widely expected move earlier this month that left the target range for the benchmark rate unchanged, new quarterly forecasts showed 12 out of 19 officials favored another hike this year. One policymaker saw rates rise above 6%.
Fed Chairman Jerome Powell said future rate decisions will be based on incoming data.
“The world is certainly not ready for a 7% Federal Reserve funds rate,” Charlie Jamieson, chief investment officer at Jamieson Coote Bonds, told Bloomberg Television on Tuesday.
“At that level, we would expect deflationary asset declines and that would burst a lot of asset bubbles that simply wouldn’t be sustainable.”
–With assistance from Derek Walbank, Abhishek Vishnoi and Sarina Yu.
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