JPMorgan Chase Warns US Is ‘Past the Point of No Return’

A customer exits the lobby of JPMorgan Chase & Co. headquarters in New York May 14, 2012. Eduardo Munoz/Reuters

JPMorgan Chase strategists warned Monday that recession chances have surged amid the banking crisis since the collapse of Silicon Valley Bank.

“The Fed is facing a difficult task on Wednesday, but it is likely already past the point of no return,” JPMorgan’s strategists wrote in a note to clients this week, according to news outlets. “A soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending).”

That warning came ahead of the Federal Reserve’s meeting this week in which members of the Federal Open Market Committee will decide on whether to raise interest rates again in the midst of decades-high inflation. Starting last year, the Fed has incrementally raised rates to their highest levels in years, a move that drew warnings from economists that a recession could come later this year or next year.

“Even if central bankers successfully contain contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators,” JPMorgan Chase strategists added in their note.

Earlier this month, two major regional banks—Silicon Valley Bank and Signature Bank of New York—collapsed after customers withdrew their deposits en masse amid warnings about the health of the two respective banks. The federal government has attempted to reassure consumers and investors that the U.S. banking system is sound and that deposits will be insured, with Treasury Secretary Janet Yellen touting the government’s efforts to tame contagion during a Senate hearing last week.

“We stay cautious on risk assets which price in too little recession risk, while the banking crisis raises the prospect of recession this year as credit is restricted,” JPMorgan’s strategists added. Meanwhile, JPMorgan Chase’s Marko Kolanovic warned that market turbulence, economic uncertainty, and bank collapses have increased the chances of a so-called “Minsky moment” in which an economic boom has caused investors to take on too much risk and have to sell assets to repay loans, reported Bloomberg.

Amid the Fed meeting this week, investors have speculated that board members will ease up on its monetary tightening efforts to avoid placing more strain on the banking system. Among them, Goldman Sachs analysts wrote last week that the central bank will likely hold off on raising rates, while others have speculated the Fed will raise rates by a relatively small amount.

The Fed, whose relentless rate hikes to rein in inflation are among factors blamed for the biggest banking sector meltdown since the 2008 financial crisis, is poised to raise rates by only 25 basis points (bps) rather than the previously expected 50 bps, owing to the fallout of the banking crisis.

The latest move to restore calm to restive regional bank stocks came as Pacific Western Bank, one of the regional lenders caught up in the market volatility, said it had raised $1.4 billion from investment firm Atlas SP Partners.

Shares of the bank, which have lost nearly 47 percent of their value so far this year, were down by around 10 percent in early trading even as it tried to assuage investor worries by saying it had more than $11.4 billion in cash as of March 20.

More Warnings

The chance of a recession is on the rise again for the first time since November, said a survey released by Bank of America on Tuesday that polled fund managers. Some 42 percent of fund managers said they believe a recession will come within the next 12 months, and 80 percent believe the economy will remain stagflationary over the next year or so.

Last week, Goldman Sachs Chief Economist Jan Hatzius wrote that he believes there will be a 35 percent chance of a recession within the next 12 months. That’s because of what he called  “increased near-term uncertainty” around the economic impacts of small bank collapses like SVB or Signature.

Jeffrey Gundlach, the chief executive of DoubleLine Capital, said a recession could happen within the next four months. “With all that’s going on I think a recession is probably within four months at the most,” Gundlach said in a Twitter Spaces audio chat on Thursday.

Reuters contributed to this report.