Jamie Dimon, CEO of JPMorgan Chase,
and Larry Fink, CEO of BlackRock, have
warned investors to prepare for the
possibility of the Federal Reserve keeping
interest rates high for a longer period of
time, going against the popular belief
that the central bank will cut rates later
this year.
Dimon's warning came during a call to
discuss JPMorgan's first-quarter results.
He stated that there could be negative
consequences for investors and
companies who are not prepared for the
risk of an extended period of tighter
monetary policy. He pointed to the sell-
off of UK government debt last year
following a budget mishap as evidence
of the possible impact.
Fink shared similar sentiments in an
interview, stating that he believes
inflation will persist longer than expected,
and the Fed may need to continue
increasing rates by 50-75 basis points.
The first-quarter results of JPMorgan,
Citigroup, and Wells Fargo showed how
higher interest rates have been beneficial
for the largest US banks, as they have
been able to charge more for loans
without significantly increasing savings
rates for depositors. However, smaller
regional banks may struggle with the
continued high interest rates.
Several regional banks, including
Comerica, Western Alliance, and Zions
Bank, are due to report their earnings
next week. These banks have already
seen their share prices drop significantly
following the collapse of Silicon Valley
Bank, and investors are concerned about
their holdings of long-dated US
Treasuries and loans made when interest
rates were lower.
Markets have long expected the Fed to
cut rates sooner than expected. However,
Dimon and Fink's warnings suggest
otherwise. The futures market is currently
predicting two rate cuts in the latter half
of this year, but Dimon stated that he
wouldn't describe the expected
tightening as a credit crunch.
Despite Dimon's warnings, JPMorgan
increased its outlook for earnings from
lending, known as net interest income, by
almost 10% to approximately $81 billion
for 2023. This outlook is based on the
assumption that a rate cut would reduce
the need for the bank to increase rates
for depositors to prevent them from
transferring cash to higher-yielding
products.
However, Dimon's personal views on
inflation are at odds with JPMorgan's
forecast, which is based on market
pricing. First-quarter results from banks
such as Citi and Wells Fargo showed the
underlying strength of the US economy
and provided further evidence that the
Fed may not need to lower rates this
year.
Not all Wall Street executives agree with
Dimon and Fink's predictions. Citi CFO
Mark Mason stated that he expects rates
to flatten after the second quarter and
trend down towards the end of 2023 to
around 4.5%.
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