The head of the largest U.S. bank said markets were underestimating the speed at which he expects the Federal Reserve to raise interest rates.
In a letter to shareholders released on Monday, JPMorgan Chase CEO Jamie Dimon added that short-term borrowing costs needed to be “significantly” higher to keep up with the rapid pace of price increases.
“The stronger the recovery, the higher the rates that follow (I think this could be significantly higher than what the markets are expecting)”, Dimon writes in the annual letter.
Dimon’s remarks suggest the Fed could raise interest rates more than 2.50% this year as some betting markets price in.
High inflation and a strong labor market recovery prompted Fed Chairman Jerome Powell and his colleagues to forgo the central bank’s extraordinary pandemic-era monetary stimulus. Beginning with the first post-COVID interest rate hike last month, the Fed is now in the early innings of an interest rate hike cycle that will likely include further interest rate hikes during the rest of 2022 – and probably beyond.
But the question remains open as to how far the Fed should raise short-term interest rates (now within a target range of between 0.25% and 0.50%). There is also the question of how quickly the Fed should implement these rate hikes.
Several Fed officials are hinting that a double interest rate hike could occur in upcoming meetings. For example, San Francisco Fed President Mary Daly told the Financial Times on Friday that she sees the case for a 0.50% increase in interest rates in May.
The Fed hasn’t raised interest rates in increments above 0.25% since 2000. Dimon said the Fed should be open to more aggressive action if data continues to show “unprecedented” inflation.
“One thing the Fed should be doing, and appears to have done, is to exempt itself – give itself ultimate flexibility – from the pattern of only 25 basis point rate hikes and do it on a regular schedule,” Dimon said.
The Fed itself is planning seven rate hikes in total until the end of this year (to a target rate between 1.75% and 2.00%). Fed funds futures markets are pricing in the chances of a more aggressive Fed (at a target rate between 2.5% and 2.75%).
The country’s main banks should benefit from higher interest rates. Although JPMorgan Chase and the other big banks have made strong profits despite rock bottom interest rates, higher rates would allow banks to increase spreads on their lending products (i.e. business loans, mortgages, credit cards).
In January, when the Fed telegraphed fewer rate hikes than today, Dimon was telegraphing in the same way that he could see the central bank moving faster than expected.
Brian Cheung is a Fed, economics and banking reporter for Yahoo Finance. You can follow him on Twitter @bcheungz.