Analysts are eagerly awaiting the day Jerome Powell announces rate cuts, but JP Morgan CEO Jamie Dimon fears Wall Street could be in for a nasty shock instead.
Dimon worries that the Fed may raise rates beyond their current two-decade highs instead of cutting them.
Not only will it send shockwaves down the street, he said, the economy in general may not be ready for the decision.
“When we look at risk and rates, we don’t always guess what the future holds, [we are] looking at a variety of outcomes,” Dimon told CNBC During the JP Morgan Global China Summit in Shanghai.
“Do I think rates will go up a bit? Yes I do. Is the world ready for it if they do? Not really.”
This is a caveat that flies in the face of the general consensus.
Earlier this month, Reuters updated an ongoing survey of economists that asked when they expected the central bank to start cutting rates. Nearly two-thirds of economists surveyed, 70 out of 108, believe the first cut will come in September to a range of 5.00%-5.25%.
These expectations have changed from a more optimistic outlook a month ago, when 26 economists said they expected a cut in July and four said they expected a cut in June. By May, 11 were waiting for the July cut, but no one believed a downward revision would happen in June.
Sticky inflation
While Dimon’s take may be at odds with the public consensus — the 68-year-old finance industry veteran says bankers are “lulled” into a sense of security — his reasoning is familiar.
“Could inflation be stickier than people think? I think the odds are higher than other people think,” he explained. It’s still in the system, it’s still driving some of this liquidity that you see, the markets going up, the prices of certain assets and things like that.
“So I’m cautious.”
Indeed, inflation may not be as accommodative as the central bank had hoped. The latest data from the US Bureau of Labor Statistics for April showed the CPI rose 0.3% on a seasonally adjusted basis, rising 0.4% in March.
The all-commodity index rose 3.4% in the 12 months ended April, however, compared with 3.5% in the 12 months ended March.
While some factors are working in the Fed’s favor, the Bureau of Labor Statistics reported earlier this month that U.S. employers added only 175,000 jobs in April — and Dimon isn’t the first to warn that the Fed’s inflation fight could get worse before it gets better.
Last year Citigroup CEO Jane Fraser—who was ranked highest Good luck A list of the most powerful women – explained that if history is a guide, the second half of reining in inflation will always be more difficult than achieving the initial downturn.
In October, he said “all the numbers” suggested the economy was in for a soft landing, but he said the second half of an economic plan was the “tough half.”
Dimon—Shocked the market by saying he plans to retire in the next five years, Dimon said stubborn inflation could lead to what he sees as a “bad” outcome for America: stagnation.
He added: “Looking at the range of outcomes, again, the worst outcome for all of us is what you call stagnation, higher rates, recession. That means corporate profits will drop, and we’ll get through all of that. I mean, the world has survived that, but I think the odds are higher than other people think. I think.
