According to Jamie Dimon, CEO of JPMorgan, the global economy may not be adequately prepared for the worst-case scenario of US interest rates rising as high as 7% accompanied by stagflation. Since March 2022, the US Federal Reserve (Fed) has increased the benchmark borrowing cost by 525 basis points in an effort to curb inflation, partly leading to the crypto market crash in the past year. Dimon believes that in order to control persistent inflation, the Fed may have to continue raising rates, which could have a more severe impact on the global economy. He expressed concern that if higher rates coincide with lower volumes, it could contribute to stress in the financial system.
The consequences of rates reaching 7%, combined with stagflation, would heighten the risk of the US economy falling into a recession, which would be unfavorable for risk assets such as technology stocks and cryptocurrencies. Moreover, if the tightening cycle continues, it would push US Treasury yields, already at elevated levels, to multi-decade highs. This would make bonds more attractive, draining capital from risky investments. Dimon’s remarks diverge from the popular belief that the Fed’s tightening cycle has reached its peak. The central bank has indicated its intention to keep borrowing costs higher for a longer period.
In summary, Jamie Dimon has expressed concern that the global economy may not be adequately prepared for the possibility of US interest rates rising to 7% alongside stagflation. He believes that the Fed may need to continue increasing rates to combat persistent inflation, but warns that this could have a more detrimental impact on the global economy. Dimon’s remarks also highlight the potential risks of a recession and the impact on risk assets such as technology stocks and cryptocurrencies. Additionally, the tightening cycle could lead to higher US Treasury yields, making bonds more attractive and diverting capital from risky investments.