While speaking with The Times of India, JPMorgan Chase & Co. (NYSE: JPM) CEO Jamie Dimon has issued a stark warning about the potential fallout if Federal Reserve benchmark interest rates were to soar to 7%.
According to Dimon, such a scenario, if realized, could spell disaster, leading to a financial stress test of epic proportions. He invoked Warren Buffett's famous saying, "You find out who is swimming naked when the tide goes out," to illustrate the revealing nature of difficult economic conditions.
"That will be the tide going out," Dimon said.
As Bloomberg reported, contrary to the prevailing consensus that the Fed is nearing the end of its tightening cycle, with benchmark rates already at an over two-decade high of 5.5%, Dimon's concerns underscore the possibility of further rate hikes.
He pointed out that the leap from 5% to 7% could inflict far more pain on the economy than the prior move from 3% to 5%.
Market sentiment seems to resonate with this warning, as the U.S. dollar, tracked through the Invesco DB USD Index Bullish Fund ETF (NYSE: UUP), surged. This uptick was primarily driven by hawkish remarks from Federal Reserve officials.
Rising Concerns: How 7% Interest Rates Could Rattle the Economy
If Dimon's apprehensions materialize, it would have dire consequences for American businesses and consumers.
Bloomberg reports that economists already place a 60% probability of a U.S. recession within the next year, and some predict an economic downturn potentially beginning this year.
Such a high interest rate could also shatter the recent optimism among Fed officials about engineering a soft landing for the economy, given the still-low unemployment rate of 3.8% and signs of moderating prices.
Dimon's concerns resonate with experts like Charlie Jamieson, chief investment officer at Jamieson Coote Bonds, who believes that a 7% Federal Reserve funds rate would lead to a deflationary asset unwind, burst asset bubbles, and overall economic instability, according to Bloomberg.