Hike rates

The Fed could raise rates more than expected if the recovery is strong

  • Jamie Dimon said a stronger recovery could see the Federal Reserve raise rates more than the market expects.
  • The Fed should break its pattern of limiting hikes to 25 basis points and raise rates as much as necessary, he said.
  • The JPMorgan CEO said the Fed shouldn’t worry about market volatility because a stronger economy is more important.

JPMorgan Chase CEO Jamie Dimon said that


Federal Reserve

could raise interest rates more than markets currently expect, if the US economic recovery is strong.

The US central bank is planning a series of at least seven rate hikes this year to combat runaway inflation, and it has said it will shrink its balance sheet and end its asset purchases.

But some analysts fear that its decision makers could tip the United States into a recession as they withdraw their support for the economy.

“I don’t envy the Fed for what it has to do next: the stronger the recovery, the higher the rates that follow (I think that could be significantly higher than what the markets are expecting),” he said. said JPMorgan CEO Dimon in his annual letter to shareholders Monday.

The Fed in March rate hike for the first time since 2018, by 25 basis points — its normal level of increase. He did not raise rates by more than a quarter of a percentage point since May 2000.

But the highest inflation in 40 years has caused its officials to think again, and markets are now expecting a 50 basis point hike in May, and another of the same magnitude in June. And on the weekends, San Francisco Fed President Mary Daly told the Financial Times the case for raising interest rates by 50 basis points strengthened at the May meeting.

Dimon said the Fed should not be limited to its usual approach to the size and pace of rate hikes, but should respond to the needs of the situation.

“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,” did he declare.

“And while they may announce how they intend to reduce the Fed’s balance sheet, they should be free to modify that plan at any time, in order to respond to real events in the economy and markets.”

“A Fed that reacts strongly to real-time data and events will ultimately create more confidence. Either way, rates will need to rise significantly.”

The central bank’s current target range for interest rates is between 0.25% and 0.50%, and six more hikes to 25 basis points would take that figure to between 1.75% and 2% by now. the end of 2022. But the market is pricing between 2.5% and 2.75%, going through the fed funds futures markets.

If the Fed does a good job, there will be economic growth and lower inflation for years to come, Dimon said. This could lead


volatility

in markets – but that shouldn’t necessarily be of concern to policy makers.

“The Fed shouldn’t worry about market volatility unless it affects the real economy. A strong economy outweighs market volatility,” he said.

There are hopes in the market for a Fed “put” – the idea that the central bank will step in to limit a fall in stocks once they fall below a certain level, according to Morgan Stanley’s Lisa Shalett.

Dimon said the Fed’s move from quantitative easing (QE) to quantitative tightening (QT) will trigger a significant shift in the flow of funds, which will have massive impacts on the market and the economy.

“The Fed has to deal with things it has never dealt with before (and which are impossible to model) including supply chain issues, sanctions, war and a reversal of QE in the face of a unprecedented inflation,” he said.

The combination of the recovery from the coronavirus pandemic, skyrocketing inflation and war in Ukraine “significantly increase the risks ahead,” Dimon said.