This billionaire thinks the Fed will bring rates to 7%—should you be worried?
Data shows that most CEOs don’t last more than seven years.
That can't be said about Jamie Dimon, who has been at the helm of JPMorgan, the largest bank in the world, for nearly twenty years.
Whatever you think about Dimon, he's weathered severe storms while captaining JP Morgan, including the Great Recession, and more recently, COVID. Mind you, Dimon didn't just survive these events; he thrived.
So, when this asset manager speaks, he does so from a place of authority. That's why his most recent forecast is making Wall Street uneasy.
In a recent interview with The Times of India, he predicted the Fed's most aggressive rate-hiking campaign may not be through. He believes rates could climb as high as 7%, a level not seen in decades.
From anyone else, this projection could be ignored. But coming from Dimon, it's prudent to take a closer look.
Who is Jamie Dimon, and why should we care what he thinks?
Jamie Dimon isn’t just another suit on Wall Street, he’s a bonafide industry maverick with a resume to back it up.
- Dimon enjoys a net worth of $1.7 billion
- He’s led JP Morgan—the world’s largest bank by market capitalization—for nearly two decades
- Dimon’s career survived the “London Whale” incident in 2021, where a JPMorgan Chase trader lost over $6 billion on a risky bet and Dimon ultimately took full responsibility for the oversight failure
- During the Global Financial Crisis, he stood up to then-President Obama, and challenged the wisdom of applying excessive regulation that could impact the competitiveness of U.S. banks
- During this same period, in 2008, Dimon refused a bonus as a matter of principle, stating the circumstances surrounding the downturn and the role that big banks played meant it was the right thing to do
- Wall Street eagerly awaits Dimon’s annual letter to shareholders, where he shares his views on the economy, public policy, corporate governance, and other topics. The yearly letter is perhaps only second in anticipation to Warren Buffett’s.
- Under his leadership, JP Morgan underwent a challenging period of substantial change. Ultimately, he helped shape it into one of the world's most successful financial institutions.
Why does Dimon think rates could reach 7%?
While Dimon “hopes and prays there is a soft landing” for the U.S. economy, he’s worried about the persistently uncertain macroeconomic backdrop coupled with an expanding government deficit.
“I think we are feeling pretty good because of all the monetary and fiscal stimulus, but it may be a little more of a sugar high,” Dimon recently told The Times of India.
There are two primary reasons Dimon says rates could climb as high as 7%.
- Deficits can't continue indefinitely - A climbing U.S. deficit and other issues, like the war in Ukraine and volatile energy markets, mean policymakers have to lean on higher rates more than initially thought.
- Historically high inflation - Although inflation has cooled substantially since last summer when it was above 9% annually, it remains high at 3.7%. This means price acceleration persists at nearly twice the rate of the Fed’s 2% target.
What are the consequences of higher rates?
Rising rates can have several consequences.
- Higher borrowing costs: Higher rates drive higher borrowing costs for car loans, credit cards, and mortgages
- Higher savings rates: While borrowing is more expensive, saving is more attractive; when rates rise, so does the interest you can earn on savings accounts and fixed-income investments
- Stock market headwind: If rates continue to rise, it could generate additional headwinds against the stock market. Higher rates mean it’s costlier for businesses to borrow. As a result, they tend to invest less in growth.
- Slowing economy: With less business investment, employment can slow with fewer new hires
- Reduced spending: Higher rates can lead to a reduction in consumer spending. For example, financing a car becomes more expensive and less desirable.
- Inflation: Higher interest rates are typically a response to inflation. If rates do climb to 7%, it means price acceleration likely persisted at relatively high levels.
- An appreciating U.S. dollar: Higher rates can attract foreign investment, increasing local currency. While it can reduce the cost of imported goods, it can make exports more expensive, potentially softening demand for American goods that rely on export markets.
How can you prepare for rising rates?
- Budgeting: Consider reviewing and adjusting your budget to accommodate the potential rise in interest costs. This is particularly important for people with variable-rate debt.
- Refinancing: If you’re convinced rates will rise, it might make sense to refinance your variable-rate loans to lock in lower fixed rates
- Focus on debt: Try to focus on tackling high-interest debt before rates climb even higher
- Savings and investments: Review your investment strategy to determine whether you can reallocate assets to take advantage of higher rates. For example, purchasing variable-rate Certificates of Deposit (CDs) will allow you to benefit in a rising-rate environment.
If you’re unsure how to proceed, talk with a financial advisor.
Speaking with a professional is especially important given Dimon’s belief that the 200 basis point rise needed to hit 7% will be more painful than previous, identical steps—for example, going from 3% to 5%.
“Going from zero to 5% caught some people off guard, but no one would have taken 5% out of the realm of possibility. I'm not sure if the world is prepared for 7%. I ask people in business, ‘are you prepared for something like 7%?,’” he said in the interview.