The head of Wall Street’s biggest bank is among those bracing for the possibility that the Federal Reserve will need to lift interest rates more than the market is currently pricing in, warning that policy tightening won’t necessarily be as “sweet and gentle” as some might expect.
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told analysts on Friday that the Fed could lift its benchmark interest rate as many as seven times to fight rising inflation, although he didn’t specify how quickly that might happen.
Interest-rate traders have already amped up their expectations for Fed tightening this year as the central bank has reiterated its commitment to fighting accelerating consumer-price inflation, which data this week showed is now running at an almost four-decade high of 7%. Swaps markets currently indicate between three and four standard quarter-point hikes for this year and around six by the end of 2023.
“I expect more interest rate increases than is in the implied curve,” Dimon said Friday on a conference call with analysts after JPMorgan released its fourth-quarter results. “My view is a pretty good chance there will be more than four. It could be six or seven.”
The prospect of four hikes in 2022 is looking increasingly likely, with a growing group of banks switching their official forecasts to reflect that. And while markets haven’t yet moved to fully price in a full percentage point of increases for this year, it has been getting closer and traders have been very active in guarding themselves against the risks of a quicker-than-anticipated cycle. With hawkish Fed rhetoric and a hot CPI reading taking center stage this week, demand for eurodollar option structures that protect against Fed hikes has been palpable, with some even contemplating the prospect of a half-point hike in March.
“The consumer is very strong” and businesses “are in very good shape,” Dimon said. “The table is set pretty well” in terms of growth “with obviously the negative being inflation.” He also said that it would be a mistake to assume the economy won’t grow during a period in which interest rates are increasing.
In light of that, he expressed some surprise that longer-term U.S. interest rates haven’t risen more. The 30-year Treasury yield is currently hovering around 2.09%, still within its pandemic era range, while this month’s advance in the 10-year rate has lost steam since edging to 1.81% just above where it was in early 2020. In Dimon’s view, long rates could ultimately react more to an actual wind down of the Fed’s expanded balance sheet—so-called quantitative tightening. That’s a process that has not yet been announced, although market expectations for when that will take place have been brought forward.
Several years ago, before the coronavirus pandemic derailed the global economy and forced central banks to take emergency measures and drag down rates again, Dimon was also among those warning against the prospect of much higher yields. Back then he cautioned that the 10-year Treasury rate should actually be around 4% and could in fact go higher than that. The pandemic, of course, stymied that, but even well before the coronavirus struck, the benchmark had fallen by half after topping out at just over 3.25%.
The current prediction of JPMorgan’s economics team is that the Fed will start lifting its overnight target in March and increase it on a quarterly basis after that, a view that has been echoed by a number of major banks such as Deutsche Bank AG and Morgan Stanley. The median forecast of Fed officials themselves, meanwhile, is for 75 basis points of tightening this year.
But just because the Fed has tended to take a gradual approach to tightening in recent cycles, that doesn’t mean that an acceleration is out of bounds. In his discussion of policy prospects, Dimon harked back to the era in which former Fed chief Paul Volcker acted to raise interest rates by several percentage points in one go.
“This whole notion that it’s going to be sweet and gentle and no one’s ever going to be surprised, I think is a mistake,” he said.
—With assistance from Sonali Basak.
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