Key insights
- Jamie Dimon warns of a potential interest rate shock due to the conflict in the Middle East driving up oil prices and disrupting supply chains. He suggests that inflation may be stickier and interest rates higher than markets currently expect, even in the US where traders aren't pricing in further Fed rate hikes. This highlights downside risks to the global economy and US equities.
The global economy will be rocked by an even bigger interest rate shock than expected from war in Iran, JP Morgan’s boss has warned.
Jamie Dimon, head of the world’s biggest bank, said on Monday that borrowing costs could be forced higher as the conflict in the Middle East pushes up oil prices.
“Because of the war in Iran, we face the potential for significant ongoing oil and commodity price shocks, along with the reshaping of global supply chains,” Mr Dimon said in his annual letter to shareholders.
This “may lead to stickier inflation and ultimately higher interest rates than markets currently expect”, he added.
The comments will surprise US traders, who have not priced in any interest rate increase from the Federal Reserve this year or next.
The US benchmark rate is currently at 3.5pc to 3.75pc. In the UK, traders are betting that the Bank of England will lift rates twice from 3.75pc to 4.25pc this year.
However, Mr Dimon, one of the most influential voices on Wall Street, suggests that even higher rate increases could be on the cards.
Mr Trump has repeatedly called on the Federal Reserve to cut borrowing costs faster, taking aim at Jerome Powell, the outgoing Fed chairman, for not cutting rates.
Mr Dimon’s warning underlines the risks to the global economy from the war and fears the conflict will sap the economy for months to come, even if a ceasefire is agreed.
In his 48-page shareholder letter, Mr Dimon also suggested that Mr Trump may struggle to end the war he started and warned about the growing cost of energy.
“War is the realm of uncertainty, as each side in a war determines what it wants to do (as is often said, ‘the enemy gets a vote’), and these conflicts involve many countries.
“Nations that are heavily dependent upon imported energy are already seeing the effects. And it’s not just energy, it’s commodity products that are byproducts of oil and gas, like fertiliser and helium.”
He added: “Given our complex global supply chains, countries are experiencing disruptions in shipbuilding, food and farming, among others.
“The outcome of current geopolitical events may very well be the defining factor in how the future global economic order unfolds – then again, it may not.”
Mr Trump is currently embroiled in a legal tussle with Mr Dimon and JP Morgan, having sued the bank earlier this year for $5bn (£3.7bn), claiming his account was shut down for political reasons. JP Morgan has said the lawsuit has “no merit”.
The banking chief also took a swipe at Mark Carney, the Canadian prime minister, who has urged so-called middle-power countries to come together.
“Middle powers must act together because if we’re not at the table, we’re on the menu,” Mr Carney told Davos in January, as Mr Trump threatened to seize Greenland.
However, Mr Dimon warned that both the West and America would be worse off from such an approach.
“Some political leaders have said that there is a ‘rupture’ between America and the Western world – that the red lines have been crossed and there is no return to the prior system. I completely disagree,” he said.
Mr Dimon instead called on US leaders to “fix the current situation” and work together more closely.
The JP Morgan chief hit the headlines earlier this year when he warned about private credit, saying more “cockroaches” would emerge from the system.
In his letter, he said that losses from the sector would be “higher than expected” when the market turns negative.