Growing fears of rising U.S. interest rates -- expected to bring higher monthly payments on everything from mortgages to credit cards and business loans -- are roiling financial markets, putting the Standard & Poor's 500 Index of large stocks on track for its worst week in seven months.
But guess who saw higher rates coming? None other than Jamie Dimon, CEO of JPMorgan Chase & Co. (JPM - Get Report) , the nation's biggest bank. On April 5, in his annual letter to shareholders, Dimon wrote that the strength of the economy, stimulated by President Donald Trump's $1.5 trillion of tax cuts, could usher in an era of rising wages for workers and higher inflation.
To prevent inflation from spiraling out of control, the Federal Reserve might then need to raise rates faster than many traders expected, Dimon wrote at the time.
"I believe that many people underestimate the possibility of higher inflation and wages, which means they might be underestimating the chance that the Federal Reserve may have to raise rates faster than we all think," Dimon wrote in the 47-page missive.
Now, as more investors come to grips with the likelihood of rising interest rates, Dimon told investors on a quarterly conference call on Friday that he's "surprised when people are surprised." And Dimon, who has held onto his post for 12 years, more than any other big-bank CEO, said on the call that rates are poised to go higher still -- with 10-year U.S. Treasury yields possibly hitting 4%, up from about 3.13% now. (They've jumped up from about 3% a month ago.)
"People should be prepared for that," Dimon said, according to a transcript. "The economy strong. Rates are going up. Most of us consider a healthy normalization and going back to a more of a free market when it comes to asset pricing and interest rates, etc. And we need that."
The S&P 500 tumbled 5% this week on the rate fears -- such a drastic selloff that Trump used a series of press gaggles and interviews to complain that the Fed was raising rates too quickly.
JPMorgan's own shares weren't insulated to the reckoning; the stock tumbled 7.1% on the week, wiping out gains for the entire year. And that happened even as the bank on Friday posted a better-than-expected 24% increase in third-quarter profit.
Economists say that Trump's tax cuts have accelerated a steady rise in yields on the 10-year U.S. Treasury notes, due to the increased supply of the securities in the market: The government has to sell more of the bonds to fund ever-widening federal deficits, which have rapidly ballooned the national debt past $21 trillion.
The U.S. unemployment rate fell last month to 3.7%, a level not seen since the first year of Richard Nixon's presidency in 1969. A low jobless rate often leads to faster inflation: As workers become harder to find, wages start to increase as businesses compete to recruit and retain staff, in turn driving production costs higher. Eventually, businesses try to pass those costs along to consumers.
Fed officials including Chairman Jerome Powell and John Williams, a monetary-policy expert who leads the U.S. central bank's New York branch, say they're raising short-term interest rates to keep inflation from rising; currently, prices are climbing at a 2.2% clip, not too far above the 2% level that monetary policymakers target.
Trump's argument is that there's no need for the Fed to slow down the economy -- with rate increases -- until inflation actually starts creeping up. He also wants to keep interest rates low because he has personal debts he wants to pay off, based on remarks reported Thursday by Bloomberg News.
"I don't want to slow it down even a little bit, especially when you don't have the problem of inflation," Trump told reporters Tuesday in Washington. "I just don't think it's necessary to go as fast."
The Fed has currently set its benchmark interest rate in a range between 2% and 2.25%, and officials at the central bank project, on average, that the rate will reach 3.4% by the end of next year. That would imply at least four quarter-percentage-point hikes next year after an expected rate increase at the Fed's December meeting.
Yet financial markets have only priced in expectations for two to three hikes in 2019. And that could imply stock and bond investors could face further market turmoil as the reality unfolds.
Mike Mayo, a longtime bank analyst at the rival U.S. bank Wells Fargo & Co. (WFC - Get Report) , told Dimon on Friday's call that "it doesn't seem like the market's digesting as maybe as well as you might have thought the market would digest."
"People shouldn't be surprised," Dimon replied.
As long as the economy's strong, rising rates should be viewed as a healthy indicator, he said. That's in contrast to, say, a slow-growing economy with rapid inflation, which would also theoretically cause interest rates to rise.
"This is my own expectation," Dimon elaborated. "I have much higher odds of being at 4% than most other people. But again, the economy is strong. So as long as it's a normalized strong economy, yeah, it's a good thing."
He was right the last time.
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