n a recent interview with The Economic Times, JPMorgan CEO Jamie Dimon issued a warning about the possibility of US interest rates surging as high as 7%. He attributed this potential scenario to various factors, including substantial fiscal spending and the global energy transition, both of which have contributed to inflationary pressures.
Dimon stated, “I absolutely think they’re possible,” referring to the 7% interest rates. He emphasized that if he were advising a company, he would recommend preparing for such high rates and also considering the potential for a recession.
Currently, the Federal Reserve’s benchmark interest rate falls within the range of 5.25% to 5.5%, marking a significant increase of 525 basis points since early 2022. The central bank has been aggressively raising rates, aiming to combat inflation that reached its highest point in four decades last year.
While Dimon did not make a specific prediction of an additional 150 basis points in rate hikes, he acknowledged that it remains within the realm of possibility. He pointed out that the extraordinary global fiscal spending, possibly unprecedented in history except for World War II, is a key driver of these concerns.
Dimon elaborated, “I think there are some long-term trends, which have shifted from disinflationary to inflationary. The benefits of trade going to China have diminished. The green economy alone is estimated to require $4 trillion a year. Initiatives like the IRA Act, the Chips Act, the growing militarization of the world, and increased fiscal spending—how much of this can be considered disinflationary?”
To prepare for the potential challenges posed by rising interest rates and inflation, JPMorgan, as the largest US bank, is reportedly gearing up for various scenarios. Dimon noted the unexpected transition from zero to two or three percent interest rates, which people anticipated. However, the subsequent jump from three to five percent took many by surprise.
Dimon added, “They definitely don’t expect five to seven. So my guess is that the five to seven range would have more significant consequences than the three to five range. If a recession occurs and bonds need to be rolled over while credit spreads widen, it could result in more economic challenges. Let’s hope it doesn’t come to that.”
In the wake of the Federal Reserve’s recent warning that interest rates may remain elevated for an extended period, investors have grown increasingly uneasy, leading to a spike in bond yields. The 10-year Treasury rate climbed more than 50 basis points in September alone, surpassing 4.50% and reaching its highest level since 2007.
While Wall Street has maintained hopes for a soft landing scenario, Dimon has consistently exercised caution in his assessment of the economy’s prospects.