It all seems so simple—like a Hollywood movie where the hero attacks a besieged nest only to encounter no resistance.
After months of sky-high inflation, prices finally eased after the Fed raised interest rates eight times without kicking a recession. But JP Morgan CEO Jamie Dimon can’t shake the feeling that the market has given up on the inflation war, only to discover with horror that the villain has risen from the dead in the final scene.
“People need to take a deep breath on this before declaring victory,” he said Reuters in an interview published on Thursday, inflation warnings could still prove “sticky.”
For years, the stock market has soared to new records on the back of an endless supply of cheap money thanks to low interest rates maintained by the Federal Reserve. But pandemic inflation caused by various factors forced the Fed to a policy similar to a U-turn at 100 miles per hour: the central bank stopped the monthly cadence of printing money, began to reduce the size of the bloated balance sheet and increased interest. rates range from near zero to 4.75% now.
The interest that fueled the rise led to a halt in equity markets in 2022, and stocks experienced the worst sell-off since the global financial crisis.
Fed Chairman Jerome Powell’s recent remarks that he has seen signs of price pressures easing have led investors to believe that the worst is now over.
And everywhere you look, risk assets are gathering as FOMO—fear of missing out—with a vengeance. Investors have been snapping up every bankruptcy-prone meme stock and dog-themed crypto token they can find: the riskier the better.
One rate hike may not be enough
Jamie Dimon isn’t the only one wary of the market. The rising market has been prompted by the warning of contrarians such as Michael Burry that the market has once again gotten ahead of itself.
In an interview with Reuters, Dimon dismissed speculation that Powell could pivot during the year and start cutting rates. The CEO of the most valuable bank in the world said it would be “perfect enough” for the Fed to go up another 25 basis points and leave it to observe the effect of tightening already on the economy.
If inflation measured by the Fed’s preferred yardstick, the PCE index, ends up bouncing around the 4% level, then other actions may need to be taken into consideration to bring it closer to Powell’s 2% annual target.
“You may have to go higher than 5%,” Dimon warned of interest rates. “And it can affect short-term rates, longer-term rates.”
In March, the Fed is set to update its interest rate target in March. In December, members of the policy-making committee have anticipated an average rate of 5.1%, the same as the target range of 5%-5.25%. That would mean two more hikes of 25 basis points each, raising borrowing costs to their highest levels since September 2007.
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