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Jamie Dimon: one, Jay Powell: nil.
JPMorgan Chase chief executive Dimon’s annual letter to shareholders this week struck an ominous note, predicting that too much attention is paid to month-to-month oscillations in interest rates and inflation. Rather, the big picture mega-forces portend expensive money for an extended period of time. Perhaps could it be not just “higher for longer” but “higher forever”?
On Wednesday, while only a monthly reading, the US reported a 3.5 per cent increase in consumer prices for the year to March. The figure was high enough to chill the idea of several Fed rate cuts that had been telegraphed by the central bank and assumed by financial investors.
Over the past six months, the S&P 500 has gained nearly a fifth. More interestingly, high yield credit spreads have narrowed from 500 basis points last year to about 300. The US jobless rate remains below 4 per cent while hundreds of thousands of jobs a month continue to be added.
Dimon said it was unclear if sustained high interest rates would necessarily necessitate a recession, particularly if government spending remained elevated. JPMorgan is preparing for interest rates that could toggle between 2 per cent and 8 per cent. Military spending, reshoring of industry and the energy transition, Dimon said, could promote higher price levels for some time. As such, short-term monetary policy responses may prove inconsequential.
So far in 2024, companies have wisely raced to refinance debt during this favourable window. The $600bn of bond issuance through the first quarter reflected a 40 per cent increase from last year. In part, the rush is to beat election volatility. But these borrowers have conveniently been able to jump in before the views of pessimists such as Dimon have become ingrained.
The 10-year Treasury remains elevated at approaching 5 per cent. As such, even with tight spreads, the cost of borrowing is still allowing healthy returns to lenders and bondholders.
It is also not sparing the weakest of the pack. Total commercial Chapter 11 bankruptcies in the first quarter were up 43 per cent from 2023, according to Epiq Bankruptcy.
The underlying question to Dimon’s theory of extended above-target inflation is if failing to return to a 2 per cent target rate is harmful. Consumer spending remains healthy, anyone who wants a job has one, and companies with decent prospects can raise capital. If that is sustainable, then Powell may not have to cut rates to claim victory either.