The United States is looking at an economic “hurricane” of challenges down the road and the Federal Reserve must take strong precautions to avoid a recession, a top banking official has warned.
“It’s a hurricane,” Jamie Dimon, CEO of JPMorgan Chase & Co., told a banking conference, adding that it was unprecedented.
“Right now, it’s kind of sunny, things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there, down the road, coming our way. We just don’t know if it’s a minor one or Superstorm Sandy,” he added.
Dimon’s comments come a day after President Joe Biden met with Federal Reserve Chair Jerome Powell to discuss inflation, which is hovering at 40-year highs.
The Fed is under pressure to reduce inflation, which is more than three times its 2 percent goal and has pushed up the cost of living for Americans. It must now dampen demand for cash enough to curb inflation while not causing a recession.
“The Fed has to meet this now with raising rates and QT (quantitative tightening). In my view, they have to do QT. They do not have a choice because there’s so much liquidity in the system,” Dimon said.
Quantitative tightening is a financial tool used by the central banks in a process to extract cash from the financial markets that it overly supplied. This is expected to restrict credit by making it more expensive to borrow, adding tension to an already-strained global financial market.
Global stock markets are already shaken by the war in Ukraine, prolonged supply-chain issues linked to COVID-19, higher Treasury yields, and now uncertainty about the U.S. central bank’s policy move, with the benchmark S&P 500 index falling 13.3 percent year-to-date.
“You gotta brace yourself. JPMorgan is bracing ourselves, and we’re going to be very conservative in our balance sheet,” Dimon said.
Biden has set inflation as his “top priority” in June amid his lower opinion polls and before the 2022 midterm elections.
Meanwhile, Wells Fargo & Co.’s CEO Charlie Scharf said his bank is seeing inflation directly impacting consumers’ spending on fuel and food.
He believes the Fed will find it “extremely difficult” to strike the balance between putting a dent in inflation by raising interest rates and QT without tipping into a recession.
“The scenario of a soft landing is ... extremely difficult to achieve in the environment that we’re in today,” Wells Fargo Chief CEO Charlie Scharf said at the conference.
“If there is a short recession, that’s not all that deep ... there will be some pain as you go through it, overall, everyone will be just fine coming out of it,” he added.
The average household is on average in a strong financial position, according to recent Fed reports and surveys, Reuters reported. The reports show that working families are doing well, and unemployment levels are akin to the boom years of the 1950s and 1960s.
People are keeping cash from coronavirus support programs in their bank accounts, on average, and wages are increasing for many lower-skilled occupations, Reuters reported.
But a recent Reuters-Ipsos poll has shown that confidence has reduced, with GE CEO Larry Culp telling the conference that their predictions are “any better than others.”
