Jamie Dimon JP Morgan Chairman
"Is the World Prepared for the Fed's 7% Benchmark Interest Rate Era?"
Jamie Dimon, chairman of JP Morgan, known as the "Emperor of Wall Street," predicted that the worst-case scenario of the U.S. benchmark interest rate rising to 7% could unfold.
On the 26th (local time), Dimon gave an interview to the local media Times of India in Mumbai, India, stating, "The world may not be prepared for the worst-case scenario in which the Federal Reserve (Fed) raises the benchmark interest rate to 7% due to stagflation (rising prices amid economic stagnation)."
He said, "To fight inflation, interest rates may need to be raised further," adding, "Raising the benchmark rate from 5% to 7% will cause much more pain to the economy than going from 3% to 5%." He continued, "Raising rates further will put stress on the system," and quoted Warren Buffett, who said, "When the tide goes out, you can see who is swimming naked."
Dimon's remarks came as the Fed's monetary tightening policy is nearing its final stages. Since March last year, the Fed has raised the benchmark interest rate by an unprecedented 5.25 percentage points in just a year and a half. While the market expects the Fed to either raise rates once more this year or to have finished raising them, the prevailing view is that the current high interest rates will persist for some time. Against this backdrop, Dimon mentioned the possibility of the Fed raising the benchmark rate to 7%.
The background to these remarks lies in the resilient U.S. economy despite high-intensity tightening. The U.S. Consumer Price Index (CPI) inflation rate for August rose 3.7% year-on-year. Although it has fallen from the peak of 9.1% in June last year, it remains above the Fed's target of 2%. The U.S. unemployment rate for August was also 3.8%, close to historic lows.
Dimon said that when the benchmark rate went "from 0% to 2%, the pain barely increased. When it went from 0% to 5%, some people were caught off guard, but no one excluded the possibility of 5%," adding, "I am not sure if the world is ready to accept 7%."
Contrary to the widespread market expectations of a soft landing, he has repeatedly expressed concerns about the U.S. economy. In a recent speech at a Barclays-hosted financial conference in New York, Dimon warned that "although the U.S. economy is doing well now, believing this situation will last for years would be a huge mistake." He had also described the U.S. economy as facing a "hurricane" last year.
Bloomberg reported, "Dimon's remarks came as the Fed's tightening nears its end," adding, "If the benchmark interest rate rises to 7%, it will have a serious impact on U.S. businesses and households."
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