Jamie Dimon warns inflation, interest rates may remain elevated

JPMorgan Chase CEO Jamie Dimon on Monday warned that excessive government spending in the U.S. may continue to fuel both high inflation and interest rates.

In his annual letter to shareholders, the chief executive of America’s largest bank offered his assessment on the state of the U.S. economy, the odds of a soft landing and the outlook for artifical intelligence. 

“It is important to note that the economy is being fueled by large amounts of government deficit spending and past stimulus,” Dimon wrote. “There is also a growing need for increased spending as we continue transitioning to a greener economy, restructuring global supply chains, boosting military expenditure and battling rising health care costs.” 

“This may lead to stickier inflation and higher rates than markets expect,” he added.

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Dimon’s comments come as Federal Reserve policymakers weigh when to start cutting interest rates amid concerns that progress on inflation has stalled. While inflation has fallen considerably from a peak of 9.1%, progress has largely flatlined since the summer. 

Investors have steadily dialed back their expectations as central bank officials signal they are in no rush to cut, and that incoming economic data will guide their decision. 

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Hiking interest rates creates higher rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. Higher rates have helped push the average rate on a 30-year mortgage above 8% for the first time in decades. Borrowing costs for everything from home equity lines of credit, auto loans and credit cards have also spiked. 

Yet the rapid rise in rates has not stopped consumers from spending or businesses from hiring, buoying hopes on Wall Street that the U.S. economy can avert a recession. Additionally, the S&P 500, the broadest measure of the U.S. stock market, is hovering at an all-time high. 

Dimon, however, sounded a more skeptical note about the odds of a soft landing.

“These markets seem to be pricing in at a 70% to 80% chance of a soft landing – modest growth along with declining inflation and interest rates,” he wrote. “I believe the odds are a lot lower than that.”

Although the economy has proven to be resilient, Dimon expressed concern that the government is helping to keep it afloat with large amounts of spending.

The deficits today, he said, “are even larger and occurring in boom times – not as the result of a recession – and they have been supported by quantitative easing, which was never done before the great financial crisis.”

Dimon also touched on the potential impact that AI has to transform the economy, and the world. 

“We are completely convinced the consequences will be extraordinary and possibly as transformational as some of the major technological inventions of the past several hundred years: Think the printing press, the steam engine, electricity, computing and the Internet, among others,” he wrote.