Federal Reserve officials have described the current inflation spike that’s driving up the prices of homes, semiconductors and used cars as temporary, but the CEO of JP Morgan is one in a growing chorus that predicts inflation could be here to stay.
JP Morgan CEO Jamie Dimon said he believes that cash is king. The biggest U.S. bank by assets is hoarding cash rather than using it to buy Treasurys or other investments because of the chance higher inflation will force the Federal Reserve to boost interest rates, Dimon said Monday during a conference. The bank has positioned itself to benefit from rising interest rates, which will let it buy higher-yielding assets, he said, according to a CNBC report.
The bank is expecting $52.5 billion in net interest income in 2021, down from an expected $55 billion as the company stockpiles cash and on lower credit card balances.
“We have a lot of cash and capability and we’re going to be very patient, because I think you have a very good chance inflation will be more than transitory,” Dimon said. “We have $500 billion in cash, we’ve actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates. I do expect to see higher rates and more inflation, and we’re prepared for that.”
Federal Reserve Chairman Jerome Powell has downplayed inflation risks and the Fed has said it won’t raise interest rates anytime soon. In March, Powell and Treasury Secretary Janet L. Yellen testified before the House Financial Services Committee. “We do expect that inflation will move up over the course of this year,” Powell said. “Our best view is that the effect on inflation will be neither particularly large nor persistent.”
The U.S. Federal Reserve is pinning itself in a corner when it comes to the inflation-watching stance it has adopted as consumer spending picks up, economist Mohamed El-Erian said.
Economists at Deutsche Bank warned of devastating consequences if the Fed ignores inflation, particularly for the most vulnerable in society. However, most on Wall Street see inflation as a temporary problem that will go away. Outside the consensus of policymakers and Wall Street, Deutsche warned that focusing on stimulus and dismissing inflation fears will be a mistake in 2023 and beyond.
“This could create a significant recession and set off a chain of financial distress around the world, particularly in emerging markets,” wrote Deutsche Chief Economist David Folkerts-Landau.
Morgan Stanley CEO James Gorman told CNBC’s Wilfred Frost on Closing Bell that he too thinks higher inflation may be lasting and the Fed may be forced to hike rates earlier than expected, CNBC reported.
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Investors have faith in the Fed, but the Fed could be wrong, James Mackintosh wrote for the Wall Street Journal. “Over the past three months consumer prices, excluding volatile food and energy, have risen 2 percent, equivalent to a shockingly high annual rate of 8.2 percent. Rather than panic and dump bonds, investors have piled into Treasurys and pushed 10-year yields back down to where they stood in late February.”
How the Fed responds has implications not only for its policy credibility but also for President Joe Biden’s economic reforms and global financial stability, El-Erian wrote in a June 14 Financial Times column. El Erian is president of Queens’ College, Cambridge University and an adviser to Allianz and Gramercy.
“If inflation doesn’t quickly show signs of dropping back down to rates investors and the Fed are comfortable with, the calm of the bond markets will look like complacency,” Mackintosh wrote.