While the first interest rate adjustment is expected to take place at the Federal Reserve’s upcoming meeting this week, JPMorgan CEO Jamie Dimon said that the United States economy is not “out of the woods” yet.
“I would say the worst outcome is stagflation—recession, higher inflation,” Dimon said at a Council of Institutional Investors conference in Brooklyn on Tuesday. “And by the way, I wouldn’t take it off the table.”
Inflation in the U.S. appears to be cooling, offering a glimmer of hope for consumers and the Fed. Recent data shows that consumer prices have reached their lowest 12-month inflation rate since February 2021, signaling a significant retreat from its alarming peak—9.1%—observed in June 2022.
Additionally, wholesale price measures suggest that pipeline price increases are largely under control, which indicates that inflationary pressures in the supply chain are easing.
The focus now shifts to how forcefully the Fed should respond. If the central bank is too aggressive, and the U.S. commits to plans of higher deficits and increased infrastructure spending, Dimon predicts it will have an adverse effect on an already strained economy, resulting from the Fed’s heightened interest rates.
“They’re all inflationary, basically in the short run, the next couple of years,” he stated. “So, it’s hard to look at [it] and say, ‘Well, no, we’re out of the woods.’ I don’t think so.”
Claudia Sahm, who previously worked as a Fed economist and now serves as the chief economist at New Century Advisors, suggests that initiating a half-percentage-point cut in interest rates could help prevent further deterioration in the job market. This approach might establish a minimum threshold to safeguard against potential employment declines, according to Sahm.
“The labor market [since] last July has gotten weaker,” she said in a CNBC interview on Friday. “So there’s an aspect of just recalibrating. We got some more information. [Fed officials] need to kind of clean it up, do a 50-basis-point cut and then be ready to do more.”
How Stagflation Would Impact The Job Market
Dimon’s stagflation concerns likely stems from its potential to create a prolonged period of economic hardship that is difficult to resolve through conventional monetary and fiscal policies.
The term “stagflation” refers to an environment in which persistently high inflation coincides with an economic downturn and consistently elevated unemployment levels.
Economists consider stagflation—last seen in the U.S. in the 1970s—to be worse than a recession, as it can severely impact the stock market, 401(k) plans and other retirement savings.
In 2022, former Fed chairman Ben Bernanke also warned that the U.S. was on the path to stagflation.
“Even under the benign scenario, we should have a slowing economy,” Bernanke told the New York Times. “And inflation’s still too high, but coming down. So, there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high. So, you could call that stagflation.”
In a stagflationary environment, the economy stagnates while prices continue to rise, creating a difficult situation for consumers, businesses and investors alike.
It has the potential to hamper economic growth while eroding purchasing power. As prices increase, consumers’ ability to buy goods and services diminishes, leading to reduced spending and economic activity. This, in turn, can further dampen the economy, creating a vicious cycle.
Companies could struggle with higher input costs and reduced consumer spending, which would lead to lower profits and declining stock price
In the job market, stagflation can be particularly harmful. High unemployment would persist due to the stagnant economy, yet workers would be facing rising living costs, making it increasingly difficult for them to make ends meet.
Businesses may struggle to expand or hire new employees due to increased costs and reduced consumer demand, further exacerbating unemployment issues.
Traditional tools used to combat economic downturns, such as lowering interest rates, may be less effective or even counterproductive in a stagflationary environment, as they could further fuel inflation.
The Fed will be meeting September 17 to September 18, and an announcement of at least a 25-basis-point cut to interest rates is anticipated Wednesday. Sahm, as well as Wall Street traders, project that a 50-basis-point cut is also on the table.