Dimon Warns World Not Prepared for Fed Rate of 7%

    Bloomberg News reports that it is pretty likely that the world still needs to prepare for a worst-case scenario in which the benchmark interest rate is possibly reaching 7% coupled with stagflation. The chief executive officer of JP Morgan Chase & Co., Jamie Dimon revealed the same. He said that the system will become stressed if there are lower volumes coupled with higher rates.

    What Does Experts Say?

    Experts like Warren Buffet have said that it is possible to know who is swimming naked when there is no tide or the tide goes out. As such, Dimon said that the scenario will be like the tide going out. He also said that to fight inflation, it is necessary that the rates will hike further. He cited that if compared, the case in which a 5% and 7% difference is more painful as compared to a hike rise between 3% and 5%.

    What Has Been the Consensus View?

    Damie’s comments come when the consensus is that the Fed is near the end of the tightening cycle following a 5.25% hike. This caused the benchmark to 5.5%. This is the highest ever level in the last 22 years. Yet, policymakers in the United States have signaled that it is necessary for rates to remain higher at this time to address inflation for a longer period. This need comes at a time, although it is seen that the money markets are pricing in the cuts from the coming year.

    What Happens When the Key Climbs 7%?

    Bloomberg News reports that if the key rate climbs 7%, there would be serious implications for consumers and business entities in the United States. The economists have already kept the probability of a recession in the United States over the next year at 60%.

    How Else Would it Affect the Scenario at a 7% Rate?

    A rate of 7% would likely douse the optimistic sentiment of late among the Fed officials about their capacity to engineer a soft landing in the economic setup. This is especially true when the rate of unemployment remains at a low 3.8%, coupled with the fact that there are also signs of easing out.

    The Fed is anticipated to move the target range held by them at the beginning of the current month. However, the fresh quarterly projections manifested 12 out of the 19 officials, which favored another hike this year.

    US inflation continues to be above the Fed’s 2% annual target rate. On the other hand, the prices were increasing in August in the face of the higher energy cost. There is a measure of stripping out energy and food, which quickened, fostering for the first time since February amidst a robust economy.

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