(Bloomberg) — The world may not be prepared for a worst-case scenario in which Federal Reserve interest rates reach 7% and stagflation occurs, JPMorgan Chase & Co. CEO Jamie Dimon said in an interview with the Times of India.
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“If they have lower volumes and higher interest rates, the system will be under pressure,” Dimon said during his visit to Mumbai for a JPMorgan investor summit. “Warren Buffett says that when the tide goes out, you find out who’s swimming naked. This will be the ebb tide.”
Jamie Dimon, CEO of JPMorgan Chase & Co
Dimon, who said interest rates may need to be raised further to combat inflation, added that the difference between 5% and 7% would be more painful for the economy than a rise from 3% to 5%.
His comments contrast with the general view that the Fed is nearing the end of its tightening cycle after raising its benchmark interest rate by 5.25 percentage points and raising the federal funds rate to 5.5% – its highest level in 22 years. U.S. policymakers have signaled that interest rates will need to stay higher for longer to contain inflation, although money markets are pricing in cuts starting next year.
The U.S. dollar continued its rise on Tuesday, tracking 10-year Treasury yields, partly due to the Fed’s hawkish statement and Dimon’s warning, according to Christopher Wong, Singapore-based foreign exchange strategist at Oversea-Chinese Banking Corp.
If the key interest rate were to rise to 7%, it would have serious consequences for American companies and consumers. Economists already put the chance of a U.S. recession in the next 12 months at 60% – and that’s more optimistic than Bloomberg Economics’ forecast that a slump will occur as early as this year.
A rate of 7% would erase Fed officials’ recent optimism about their ability to engineer a soft landing for the economy, given that the unemployment rate is still very low at 3.8% and there are signs of a decline in prices.
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“The increase from zero to 2% was almost no increase. The increase from zero to 5% surprised some people, but no one would have taken 5% out of the realm of possibility,” Dimon said. “I’m not sure the world is prepared for 7%.”
The Fed left the target range for its key interest rate unchanged in a widely expected move earlier this month, although new quarterly forecasts showed 12 of 19 officials favored another increase this year. One policymaker saw interest rates peak at over 6%.
Fed Chairman Jerome Powell said future interest rate decisions would be based on incoming data.
“The world is certainly not prepared for a 7% Federal Reserve interest rate,” Charlie Jamieson, chief investment officer at Jamieson Coote Bonds, told Bloomberg Television on Tuesday.
“At that level we would expect there would be a deflationary asset unwinding, a lot of asset bubbles bursting, it just wouldn’t be sustainable.”
– With support from Derek Wallbank and Abhishek Vishnoi.
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