The CEO of JPMorgan, Jamie Dimon, has issued a warning about the potential impact of a significant rise in U.S. interest rates on the global economy. According to a report from Bloomberg, Dimon believes that the world may not be adequately prepared for the worst-case scenario of rates reaching as high as 7% alongside stagflation.
Since March 2022, the U.S. Federal Reserve has been steadily increasing the benchmark borrowing cost in an attempt to curb inflation. This liquidity tightening cycle was partly responsible for the crypto market crash experienced last year. Dimon suggests that as inflation persists, the Fed may need to continue raising rates, but these impending increases could prove more damaging to the global economy.
Dimon highlights that the past increases, from zero to 2% and then zero to 5%, caught people off guard. However, he questions whether the world is prepared for rates to potentially reach 7%. The CEO warns that if higher rates coincide with lower volumes, stress will be placed on the system.
The potential implications of rates reaching 7% with stagflation are significant. There is an increased risk of the U.S. economy falling into a recession, which would have negative consequences for risk assets such as technology stocks and cryptocurrencies. Additionally, continued tightening would push U.S. Treasury yields, which are already high, to multi-decade highs. This raises concern that capital may be drained from risky investments.
Dimon’s statements diverge from the popular view that the tightening cycle of the Federal Reserve has already peaked. The central bank has previously expressed its intention to maintain higher borrowing costs for an extended period.
The warning from Dimon serves as a reminder that the global economy remains vulnerable to potential shocks created by significant shifts in interest rates. As the Federal Reserve continues to grapple with inflation, policymakers will need to carefully consider the consequences of any further rate increases to avoid damaging the stability and growth of the world economy.
