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Investors and businesses should plan for interest rates to remain higher for longer than currently expected by the market, according to JPMorgan Chase CEO Jamie Dimon.
The world saw what happened last month when higher rates and a sudden deposit run exposed bad management at Silicon Valley Bank. Earlier, rising rates and a surging dollar sparked a meltdown in U.K. sovereign debt last September, Dimon reminded analysts Friday during a conference call.
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“People need to be prepared for the potential of higher rates for longer,” Dimon said on the call.
“If and when that happens, it will undress problems in the economy for those who are too exposed to floating rates, for those who are too exposed to refi risk,” he said, referring to loans that reset at market rates. “Those exposures will be in multiple parts of the economy.”
Higher rates jammed up swaths of the economy this year, from regional bankers who had bet on low rates to consumers who can no longer afford mortgages or credit card debt. The Federal Reserve has pushed its core rate higher by roughly 5 full percentage points in the past year as it sought to subdue stubbornly high inflation.
Ironically, it was the recent regional banking crisis that sparked wagers that an economic slowdown would force the Fed to pivot and cut rates later this year. That assumption has helped underpin stock levels in recent weeks on the hope for a return to a lower-rate environment.
More bank failures?
For its part, the biggest U.S. bank by assets studies how benchmark rates closer to 6% would impact the company, Dimon said. That flies against market assumptions that the Federal Reserve will begin cutting rates in the back half of this year, reaching below 4% by January.
Dimon said he told “all” his bank’s clients to prepare for the risk of higher rates.
“Now would be the time to fix it,” he said. “Do not put yourself in a position where that risk is excessive for your company, your business, your investment pools, etc.”
Higher rates would put additional pressure on mid-sized banks like First Republic that were damaged in last month’s tumult; the value of their bond holdings moves lower as rates rise. First Republic is being advised by JPMorgan and Lazard.
While he expects regional banks to post “pretty good numbers” next week, there is the risk of “additional bank failures,” Dimon said.