NEW YORK, April 19 (Reuters Breakingviews) - Bank bosses are adding some dramatic tension to the U.S. monetary policy saga. JPMorgan’s (JPM.N) Jamie Dimon and Morgan Stanley’s (MS.N) James Gorman both warned during their first-quarter updates that inflation could prove stickier than expected, and that as a result the Federal Reserve might have to put rates up higher than the market is anticipating. It’s a possibility rather than a prediction, but when Wall Street’s highest and mightiest opine, it pays to listen.
Gorman cautioned on Wednesday that the U.S. central bank might have two more interest rate hikes to come, and that 6% would be “not shocking.” Meanwhile, Dimon on Friday said people should prepare for a world of 6% interest rates, adding that now is the time for anyone who would be caught short by such an eventuality to “fix it.” It’s not the first time he has flagged the possibility or bucked the market consensus. About a year ago, Dimon spoke darkly of the bank’s preparations for “drastically” tighter monetary policy.
Simply uttering the 6% figure out loud suggests that both captains of finance are taking the dire scenario more seriously than investors. Markets expect U.S. rates to peak at 5.25%, just a whisker above the current 5% level, according to the CME FedWatch tool. The Fed itself, in projections released last month, forecast that rates would crest at around that level, too, though not everyone on its rate-setting panel is of the same mind. One unnamed member suggested the final number could be 6%.
The Fed itself might be the least credible oracle, however. In September, it forecast a peak rate for 2023 of 4.6%, only to sail past that level by March. At the same time, the bank chiefs may be talking their books. JPMorgan in particular benefits enormously from rising interest income when rates go up. And in any case, the way lenders manage their assets and prepare for bad debt is based on elaborate internal models, not the CEO’s gut feel. Even so, it would be a mistake to discount too heavily the view of those with ringside seats.
CONTEXT NEWS
Morgan Stanley on April 19 reported $3 billion of earnings for the first quarter, a 19% fall from the same period a year earlier. During a call with analysts, CEO James Gorman warned that one of the wild cards facing markets in 2023 is the risk that the U.S. Federal Reserve fails to bring down inflation. He added that interest rates of “high 5% or 6%” would be “not shocking.”
JPMorgan on April 15 reported $12.3 billion of quarterly earnings, a 56% increase from a year earlier, driven by rising interest rates. CEO Jamie Dimon suggested that rates could hit 6%, adding that the result could be a problem for borrowers too exposed to floating rates or those who need to refinance debt. Dimon has previously warned that rates could hit 6%, and said in April 2022 that the bank was prepared for “drastically” tighter monetary policy.
The Fed’s current target rate is between 4.75% and 5%.
