While analysts eagerly await the day when Jerome Powell will announce a rate cut, JPMorgan CEO Jamie Dimon worries that Wall Street could be in for an even worse shock.
Dimon is concerned that rather than lowering interest rates, the Fed will raise them even higher than their current 20-year highs.
He said this would not only send a shock wave through the markets but also leave the economy as a whole unprepared for the decision.
“When we look at risk and interest rates, we’re not always guessing what the future holds. [we are] “We’re looking at a range of outcomes,” Dimon said. He told CNBC At the JPMorgan Global China Summit in Shanghai.
“Do I think interest rates could go up a little bit? Yes, I do. And if they do, is the world prepared for it? Not really.”
This is a warning that runs counter to the consensus among economists.
Earlier this month, Reuters updated its continuing survey of economists asking when they expect the Fed to start cutting interest rates. Nearly two-thirds of economists surveyed, or 70 out of 108, believe the first rate cut will come in September and be between 5.00% and 5.25%.
Those expectations are a change from a more optimistic outlook just a month ago, when 26 economists expected a cut in July and four expected one in June. By May, 11 had predicted a July cut, but none had predicted a downward revision in June.
Persistent inflation
While Dimon’s views may stray from the mainstream view – with the 68-year-old finance veteran saying bankers are “lured” into a false sense of security – his logic is familiar.
“Is it possible that inflation is more sticky than people think? I think the chances are higher than others think,” he explained. “The main reason is the sheer size of the fiscal and monetary stimulus. It’s still in the system, which is probably causing some of the liquidity, the market rally, the price rally of certain assets, etc.”
“So I’m being cautious.”
In fact, inflation may not be thriving as well as the Fed hoped: The latest data from the U.S. Bureau of Labor Statistics showed the Consumer Price Index rose 0.3% on a seasonally adjusted basis, after rising 0.4% in March.
But the overall index rose 3.4% in the 12 months to April, a slight increase compared with a 3.5% rise in the 12 months to March.
While there are factors working in the Fed’s favor, such as the Bureau of Labor Statistics reporting 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 fight against inflation could get worse before it gets better.
Last year, Citigroup CEO Jane Fraser said: luckTrump, who was named to the Fed’s list of “Most Powerful Women,” explained that if history is any guide, the second half of curbing inflation is always harder than achieving the initial decline.
Last October, she said “all the numbers” suggested the economy was headed for a soft landing, but added that the second half of her economic plan was the “tougher half.”
Dimon, who recently shocked markets by saying he could retire within the next five years, added that stubborn inflation could lead to stagflation, a “worst-case” outcome for the US.
He added: “I’m looking at a range of outcomes, but the worst outcome for all of us is what we call stagflation, rising interest rates and a recession. So corporate profits fall, but we get through it all. So the world has got through it, but I think that was more likely than other people think.”