JP Morgan Chase's (NYSE: JPM) CEO Jamie Dimon talked about many things in his annual letter to shareholders. He talked about a growing shadow banking system and the need for tighter rules for fintech companies. He spoke about tax loopholes that should be closed and the state of U.S. global leadership.
But most importantly, the CEO of America's largest bank predicted an economic boom, sustained by unprecedented levels of qualitative easing (QE) and deficit spending. And given the minutes of the last Federal Open Market Committee meeting, it doesn't seem like Mr. Dimon is far off in his assumptions.
In making his case, Dimon points at the dramatic differences between 2021 and the post-2008 years, especially in terms of the overall level of spending. Through QE, the Fed is slated to buy up $4.6 trillion in bonds through 2021, a figure accounting for 25% of U.S. GDP. He also notes the $6.8 trillion in deficit spending that's soon to be coming down the pipeline, which amounts to roughly 35% of U.S. GDP.
U.S. policymakers' unprecedented level of monetary intervention is a key factor in the economic boom Dimon anticipates. Given "new stimulus savings, huge deficit spending, more qualitative easing, a new potential infrastructure bill, a successful vaccine and euphoria about the end of the pandemic, the U.S. economy will likely boom," Dimon writes, projecting that this boom will last until 2023-if levels of spending remain elevated until then.
Dimon also spoke on the size of U.S. savings accounts on the part of both consumers and corporations. And how conservative leveraging requirements will make it easier for banks to lend and the $3 trillion in new bank deposits due to QE as factors in a potential credit boom. Dimon believes that these and other upbeat economic projections could account for the seemingly high cost of U.S. equities. But he also pointed out that the market will have to absorb $2.2 trillion in government debt this year alone. Not only could this have a destabilizing effect on bond prices, but the sheer amount of liquidity could also spur inflation, which could, in Dimon's view, undermine the expected economic recovery.
Higher inflation could lead cause the Fed to quickly raise interest rates, effectively pulling money out of an economy where liquidity is key, given the existential risk of emergent strains of Covid-19. But there are virtually no signs the Fed would jump the gun in this manner.
At its latest roundtable, the FOMC opted to follow outcome-based guidance rather than projections about potential inflation when making its decisions. Before the pandemic, the Fed would often hike interest rates in anticipation of inflation. But under the new policy, until full employment is reached and inflation runs hot at around 2%, the Fed likely won't be raising rates anytime soon.
Mr. Dimon closes out his expectations for the post-pandemic economy with the hope that policymakers can facilitate a "Goldilocks" economy characterized by fast growth, gently rising inflation, and a measured rise in interest rates.
Whether the Fed or Congress can facilitate an economy that's "just right" is anyone's guess.