Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. , listens during a discussion at the Business Roundtable CEO Summit in Washington, D.C., Dec. 6, 2018.
Andrew Harrier | Bloomberg | Getty Images
According to Jamie Dimon, CEO of JPMorgan Chase, the risk that the Federal Reserve will accidentally push the US economy into recession while it struggles with inflation is rising.
The chief executive of the largest US bank by assets said on Wednesday that economic growth will continue at least through the second and third quarters of this year, supported by consumers and companies flowing with cash and debt repayment on time.
“Next, it’s hard to guess. You have two other big offsetting factors that you guys are very aware of,” Dimon told analysts, referring to inflation and quantitative tightening, or reversal of the Fed’s bond-buying policies. “You’ve never seen that before. I’m simply pointing out that those storm clouds on the horizon may disappear, and they may not.”
Dimon’s comments show how quickly major events can change the economic landscape. A year ago, he said the US was enjoying an economic “moderate moment” of high growth coupled with manageable inflation that could continue into 2023. But stubbornly high inflation and a host of potential impacts from Russia’s invasion of Ukraine have overshadowed that picture.
Risks appeared on the horizon on Wednesday, when JPMorgan reported a 42% drop in profit from a year earlier due to higher bad loan costs and market turmoil caused by the Ukraine war.
Specifically, the bank took out $902 million in loan loss reserves, a stark reversal from last year, when it issued $5.2 billion in reserves.
JPMorgan took the step — unusual because executives said borrowers of all income levels were still paying their bills — as the odds of a “Fed-Reserve-driven” recession increased, according to CFO Jeremy Barnum. In the past, the Federal Reserve has raised interest rates so much that the US economy is shrinking. Last month, the Fed raised its benchmark interest rate and said the increases could come at each of the six remaining meetings this year.
Banking stocks have taken a hit this year, despite higher interest rates, which tend to improve lending margins. This is because parts of the yield curve have flattened and even inverted this year, which is a very watchful indicator of a possible recession ahead.
JPMorgan executives made it clear that they did not expect a recession; But this high inflation, exacerbated by the effects of the Ukraine war and Covid, as well as the actions of the Federal Reserve made it more likely than before. Managers have to survey a variety of hypothetical probability-weighted scenarios in judging how much reserves to put aside.
“These are very powerful forces and these things are going to collide at some point, maybe sometime next year,” Damon said during a conference call. “And nobody actually knows what’s going to happen, so I don’t expect a recession. But you know, is that possible? Sure.”
Dimon told reporters that in the event of a recession indeed, the bank will have to “devote more” to loan loss reserves. JPMorgan shares fell 3.2% on Wednesday, hitting a new 52-week low.
“Wars have unexpected consequences, you have already seen in the oil markets. Oil markets are very risky,” Dimon said. “I wish all of this stuff would just go away and go away; we’ve got a soft landing and the war’s over, okay. I wouldn’t bet all that.”