Analysts are eagerly awaiting the day when Jerome Powell announces rate cuts, but JPMorgan CEO Jamie Dimon fears Wall Street could face an unpleasant shock instead.
Dimon fears the Fed could raise rates even higher than their current two-decade high instead of lowering them.
He said not only would this send shockwaves through the streets, but the broader economy would be unprepared for the move.
“When we look at risk and rates, we’re not always trying to guess what the future will be, [we are] it’s sort of looking at a range of outcomes,” Dimon told CNBC at the JP Morgan Global China Summit in Shanghai.
“Do I think the rates can go up a bit? Yes I do. And if they do, is the world prepared for it? Not really.”
This is a warning that goes against the consensus of economists.
Earlier this month, Reuters updated an ongoing survey of economists who were asked when they expected the Fed to start cutting rates. Nearly two-thirds of the economists surveyed, or 70 out of 108, believe that the first reduction will take place in September, in a range of 5.00% to 5.25%.
Those expectations changed from the more optimistic outlook a month earlier, when 26 economists said they expected a reduction in July, and four said they expected a reduction in June. In May, 11 countries expected a reduction in July, but none thought a downward revision would take place in June.
Sticky inflation
While Dimon’s view may deviate from the consensus – with the 68-year-old finance veteran saying bankers have been “lulled” into a false sense of security – his reasoning is familiar.
“Could inflation be more stubborn than we think? I think the chances are higher than what others think,” he explained. “Mainly due to the scale of the fiscal and monetary stimulus measures. It’s still in the system; maybe that still explains some of this liquidity that you’re seeing, the rising markets, the prices of certain assets and things like that.
“So I’m just on the cautious side.”
Indeed, inflation may not be as flexible as the Fed might have hoped. The latest data from the U.S. Bureau of Labor Statistics for April reveals that the consumer price index increased 0.3% on a seasonally adjusted basis, after increasing 0.4% in March.
The all-items index, however, increased 3.4% for the 12 months ending in April, a slight increase from 3.5% recorded for the 12 months ending in March.
Although some factors are working in the Fed’s favor — the Bureau of Labor Statistics reported earlier this month that U.S. employers added just 175,000 jobs in April — Dimon is not the first to warn that the Fed’s inflation fight could get worse before it gets better.
Last year, Jane Fraser, CEO of Citigroup, which was among the highest ranked on Fortuneof ‘s Most Influential Women list, explained that if history is any guide, the second half of controlling inflation is always more difficult than the initial decline.
Last October, she said “all the numbers” suggested the economy was poised for a soft landing, but added that the second half of an economic plan is “the harder half.” .
Dimon – who recently shocked the market by saying he may be considering retiring within the next five years – added that stubborn inflation could lead to what he sees as the “worst” outcome for United States: stagflation.
He added: “I look at the spectrum of outcomes, and again, the worst outcome for all of us is what you call stagflation, rising rates, recession. This means that corporate profits will decline and we will get through all of this. I mean, the world survived this, but I just think the odds were higher than other people think.
