Jamie Dimon, who has said rates may need to rise further to fight inflation, added that the difference between 5% and 7% would be more painful for the economy than going from 3% to 5% was.
The world may not be prepared for a worst-case scenario of Federal Reserve benchmark interest rates hitting 7% along with stagflation, JPMorgan Chase & Co. CEO Jamie Dimon said in an interview with the Times of India in Mumbai. “If they are going to have lower volumes and higher rates, there will be stress in the system,” he said. “Warren Buffett says you find out who is swimming naked when the tide goes out. That will be the tide going out.” Dimon, who has said rates may need to rise further to fight inflation, added that the difference between 5% and 7% would be more painful for the economy than going from 3% to 5% was.
His comments come amid the consensus view that the Fed is approaching the end of its tightening cycle after 5.25 percentage points of hikes that lifted the benchmark to 5.5% — the highest level in 22 years. Still, US policymakers have signaled that rates will need to stay higher for longer to contain inflation, though money markets are pricing in cuts from next year.
If the key rate climbed to 7%, it would have serious implications for American businesses and consumers. Already, economists put the probability of a US recession over the next 12 months at 60% — and that’s more optimistic than Bloomberg Economics’ prediction of a slump as soon as this year.
A rate of 7% would also douse recent optimism among Fed officials about their ability to engineer a soft landing in the economy with the unemployment rate still very low at 3.8% and signs of prices easing.
“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%.”
Earlier this month, the Fed held its target range for the funds rate, in a widely expected move, though fresh quarterly projections showed 12 of 19 officials favored another hike this year. One policymaker saw rates peaking above 6%. Fed Chairman Jerome Powell has said future rate decisions will be based on incoming data, which in recent months has pointed to signs that the labor market and inflation are cooling. US inflation is still well above the Fed’s 2% annual target rate while prices increased in August in the face of higher energy costs. A measure stripping out food and energy also quickened, accelerating for the first time since February amid a still-robust economy.
Source:financialexpress.com