Jamie Dimon, the CEO of JP Morgan Chase, is warning that the Fed interest rate will rise due to the risk of slower growth and increased inflation. While officials from the Fed government say the end of the interest rate hiking cycle is near, Dimon doesn’t believe so.
Speaking in an interview with the Times of India, Dimon said the key borrowing rate of the Fed could rise from 5.25% to 5.5%. According to the CEO of the largest bank in the US by assets, when the interest rate rose from around zero to 2%, the move wasn’t felt. However, most people were caught off-guard when the interest rates moved from that level to the current level.
Fed Rates to Rise to 7%
The interview transcript quoted Dimon as saying he wasn’t sure that people were prepared for a rise to 7%. But he warned that in case of stagflation, this is where the interest rates are likely to end.
“Lower volumes and higher interest rates will cause stress to the system. Our clients should prepare for this kind of stress”, Dimon added. Dimon referenced a quote by Warren Buffet, “It is only when the tide disappears that you realize who has been swimming naked.”
The increase in interest rate will be the going out of the tide. He added that the 200 base points will cause more pain than the move from 3% to 5%.
Fed Latest Update
The comments by Dimon come shortly after Fed officials indicated in a quarterly update that they could approve a quarter percentage point before the year-end before beginning to reduce the rate in 2024.
While the Federal Reserve didn’t increase the interest rate in the recent update, they forecast that the interest rate will rise one more time this year, according to the Central Bank projections. The interest rate would settle at an average of 5.6% before the end of 2023. This is an increase from the current range of 5.25% to 5.5%. This is still the highest level the rates have gone in 22 years.
12 FED officials were for the hike, while seven didn’t agree. Before the year ends, they will hold two more policy meetings. The Feral Open committee responsible for rate hikes protect there will be two reduction in rates in 2024 to around 5.1%. This is as compared to what they had projected in June.
Causes Of Interest Rate Hikes
In a press conference, FED chairman Jerome Powel said the reduction in projected rate cuts next year resulted from lower economic growth and not stubborn inflation. But if inflation isn’t sustained, FED won’t hesitate to raise the interest rates.
If the Fed goes ahead with the move, this will translate to a full dozen hikes since the beginning of policy tightening in March 2022. The rate indicates what banks charge one another for overnight lending. However, this spills over to the consumer, including business loan interest rates.
Dimon Pessimism on Interest Rates
While speaking to the Times of India, Dimon said he would be cautious. He argued that the serious issues causing the interest hikes weren’t yet over. So, we are likely to see the rates increasing more. He adds that he hopes to see a soft landing. Since the Fed meeting, treasury yields have risen and now hovers on a 10-year high.
Inflation as a Headwind
Researchers from the Fed released a white paper on Monday that said the high inflation level may be a headwind to growth in the US and may be a challenge for the the monetary policy. According to the paper, this uncertainty can impact production, investment, and consumption. During such economic times, there is a need for consumers to have financial wellness knowledge to navigate tough economic times
