The global economy may not be ready to face the worst-case scenario of the U.S. interest rate rising as high as 7% with stagflation, CEO of investment banking giant JPMorgan (JPM), Jamie Dimon, Bloomberg reported on Tuesday.
Since March 2022, the U.S. Federal Reserve (Fed) has raised the benchmark borrowing cost by 525 basis points to the 5.25%-5.5% range to tame inflation. The so-called liquidity tightening cycle was partially responsible for last year's crypto market crash.
Per Dimon, the Fed may have to keep raising rates to subdue persistent inflation and impending upticks in the borrowing cost will likely be more damaging to the global economy.
"Going from zero to 2% was almost no increase. Going from zero to 5% caught some people off guard, but no one would have taken 5% out of the realm of possibility," Dimon said, during an interview with the Times of India. "I am not sure if the world is prepared for 7%."
"If they are going to have lower volumes and higher rates, there will be stress in the system," Dimon added.
Rates at 7% with stagflation or persistent high inflation and joblessness would increase the risk of U.S. economy falling into a recession, an undesirable outcome for risk assets like technology stocks and cryptocurrencies. Besides, continued tightening would lift the already elevated U.S. Treasury yields to multi-decade highs. Bonds already look most attractive since 2009, threatening to drain capital from risky investments.
Dimon's comments contradict the popular view that the Fed's tightening cycle has peaked. The central bank has said it intends to keep borrowing costs higher for longer.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is an award-winning media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. In November 2023, CoinDesk was acquired by Bullish group, owner of Bullish, a regulated, institutional digital assets exchange. Bullish group is majority owned by Block.one; both groups have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary, and an editorial committee, chaired by a former editor-in-chief of The Wall Street Journal, is being formed to support journalistic integrity.