JPMorgan's Dimon Is Surprised By Higher Interest Rates

Growing fears of rising interest rates in the United States – which are expected to result in higher monthly payments, from credit card mortgages to business loans – are turning financial markets upside down, placing Standard & Poor's 500 index of headlines on the way to its worst week of the last seven years.

But guess who saw the higher rates come? Jamie Dimon, CEO of JPMorgan Chase & Co. (JPM), the largest bank in the country. On April 5, in his annual letter to shareholders, Dimon wrote that the strength of the economy, spurred by President Trump's $ 1.5 trillion tax cuts, could usher in an era of rising profits. workers' wages and the increase in inflation.

To prevent inflation from becoming uncontrollable, the Federal Reserve may need to raise rates faster than expected by many traders, Dimon then wrote.

As more and more investors understand the likelihood of rising interest rates, Dimon said Friday during a quarterly teleconference that he was "surprised by people's surprise." Dimon, who has been in his job for more than 12 years, more than any other big bank CEO, said on the call that rates will go up again – 10-year US Treasury yields possibly reaching 4% , up about 3.13% now. (They jumped about 3% a month ago.)

"People should be prepared for that," said Dimon, according to a transcript. "The economy is strong, rates are rising, and most of us are looking for a healthy standardization and a return to a freer market in asset pricing and interest rates, and so on. We need it."

The S & P 500 tumbled 5% this week on rate fears – a sell so drastic that Trump used a series of press grunts and interviews to complain that the Fed was raising rates too quickly.

JPMorgan's own shares were not isolated to the account; the stock fell 7.1% on the week, reversing gains for the entire year. And this occurred even as the bank posted Friday a higher earnings growth than expected 24% in the third quarter.

Economists say that Trump's tax cuts have sped up the steady rise in 10-year US Treasury yields, due to the increased supply of securities in the market: the The government must sell more bonds to finance ever larger federal deficits, which have quickly inflated the national debt beyond 21 trillion dollars.

The unemployment rate in the United States fell last month to 3.7%, a level never seen since the first year of Richard Nixon's presidency in 1969. A low unemployment rate often leads to faster inflation: Workers are becoming more difficult to find, wages are starting to rise as companies compete with one another and retain staff, which adds to production costs. Finally, companies are trying to pass these costs on to consumers.

Representatives of the Fed, including President Jerome Powell and John Williams, monetary policy expert at the head of the US central bank branch in New York, said they were raising interest rates at short term to prevent inflation from rising; at the moment, prices are rising to 2.2%, not far above the 2% level targeted by monetary policy makers.

Trump's argument is that it's not necessary for the Fed to slow down the economy – with rate hikes – as long as inflation does not begin to rise. He also wants to keep interest rates low, because he has personal debts to repay, based on remarks reported Thursday by Bloomberg News.

"I do not want to slow down a bit, especially when you do not have the problem of inflation," Trump told reporters Tuesday in Washington. "I do not think it's necessary to go that fast."

The Fed has currently set its benchmark interest rate in the range of 2% to 2.25% and central bank officials are projecting an average rate of 3.4% by the end of this year. end of next year. This would imply increases of at least four percentage points next year after a rate hike expected at the Fed meeting in December.

Yet the financial markets have only forecast two to three rises in 2019. This could imply that equity and bond investors could face further market turbulence as the reality evolves.

Mike Mayo, a longtime banking analyst at US rival bank Wells Fargo & Co. (WFC), told Dimon on Friday: "It does not seem like the market is digesting as well as you might have thought it was. would digest. "

"People should not be surprised," Dimon replied.

As long as the strength of the economy is strong, rising rates should be considered a sound indicator, he said. This contrasts with, for example, a slow-growing economy with rapid inflation, which would also theoretically raise interest rates.

"These are my own expectations," said Dimon. "I am much more likely to be at 4% than most other people.But again, the economy is strong.So as long as it's a strong normalized economy yes, it's a good thing. "

He was right last time.

Earn money on closed – end mutual funds. Robert Powell of The Street recently hosted an expert panel of experts who explained everything you need to know about closed-end mutual funds and the often neglected investment category. Click here to sign up and watch for free.