JPMorgan CEO Jaime Dimon warns of an economic hurricane

Jaime Dimon, CEO of JPMorgan Chase, has issued a stark economic warning, saying rising commodity prices and tightening monetary policy could deliver a ‘hurricane’ blow to the US economy.

Speaking at a banking conference in New York on Wednesday, Dimon warned the gathering of investors and analysts, “You better brace yourself.”

“I said there were storm clouds, big storm clouds, but it’s a hurricane,” the US banking giant said.

“Right now it’s kind of sunny, things are going well, everyone thinks the Fed can handle this. That hurricane is over there, on the road, heading our way. We just don’t know if it’s a small one or Super Storm Sandy,” he added.

“JPMorgan is bracing us and we’re going to be very conservative with our balance sheet,” he said.

Dimon pointed to two major factors that could weigh on the economy: the Federal Reserve’s imminent move to sell assets, otherwise known as quantitative tightening; and the war in Ukraine, which is shaking global commodity markets.

As US gasoline prices hit new all-time highs on Wednesday and the price of oil hovered around $115 a barrel, Dimon argued that oil should “almost rise in price” from here.

“You haven’t had a European land war since 1945, and the complexity of Ukraine is that we don’t know the outcome,” he said. “Wars go bad, they go south, they have unintended consequences.”

After European Union leaders agreed to a phased ban on Russian oil that would push crude oil higher, Dimon predicted the conflict in Ukraine would continue to shake up commodities, saying oil prices of $150 to $175 would likely be “in the cards’ are.

As a side note to “those who like climate change,” Dimon argued that higher oil prices would only increase greenhouse gas emissions by forcing poorer countries to use more coal.

Dimon also expressed concerns about whether the Federal Reserve can safely go down the path of monetary policy tightening without crashing the economy.

The Fed began shrinking its $9 trillion balance sheet on Wednesday by selling bonds it collected as it tried to support the economy amid the COVID-19 pandemic.

During the pandemic, the Fed flooded the economy with cash at a record pace, kept interest rates near zero and bought up billions in bonds every month, otherwise known as quantitative easing (QE).

With inflation at a 40-year high, the Fed struggles to regain price stability by raising rates, selling some of the trillions in bonds it has accumulated, otherwise known as quantitative tightening (QT).

“And the new part of this isn’t the rate increase, it’s the QT,” Dimon said. “We’ve never had QE this way, that’s why we’ve never had QT this way, so you’re looking at something they could write 50 years of history books on.”

Dimon argued that aspects of the Fed’s loose monetary policy may have “backfired” during the pandemic, saying that “the negative [effective] rates was probably a big mistake.’

“I think they should do QT. They have no choice because there is so much liquidity in the system that they have to remove some of the liquidity to stop the speculation,” Dimon said.

Speculative assets like technology stocks, which boomed during the easy money days of the pandemic, have crashed back to earth as the Fed tightens policy, with the Nasdaq composite down 24 percent since the start of the year.

After flirting with bear market territory for much of May, the benchmark S&P 500 has lost trillions in market cap since the end of December.

Fears of a recession are on the rise. The US economy contracted unexpectedly in the first quarter, falling 1.5 percent, partly due to a widening trade deficit.

But faced with punishing inflation numbers, the Fed had no choice but to tighten its easy money policy in an effort to rein in consumer prices.

In April, consumer prices rose 8.3 percent from a year earlier, just below the fastest increase in four decades, a month earlier.

While many American workers have received significant pay increases, in most cases their wages have not kept pace with inflation.

High inflation also poses a political threat to President Joe Biden and Congressional Democrats as the midterm elections approach.

A poll last month by The Associated Press-NORC Center for Public Research found that Biden’s approval rating had reached the lowest point of his presidency — only 39 percent of adults approved of his achievements — with inflation an often-cited contributing factor.

Higher gasoline prices are only expected to fuel further inflation, and on Wednesday the national average gas cost rose to a record high of $4.67 per gallon, with prices rising 48 cents in May alone, according to AAA.

The summer travel season kicked off just days ago with the Memorial Day holiday, and unless oil supplies ramp up quickly, prices at the pump will only continue to rise in the months to come.

“So far, the pent-up urge to travel due to the pandemic has outweighed the high pump prices for many consumers,” said Andrew Gross, AAA spokesperson.

“If pump prices continue to rise, will people change their summer travel plans? That remains to be seen,” he said.

Data from Wednesday showed that while US job openings fell in April, they remained at a high level.

San Francisco Fed President Mary Daly also said she sees a rate hike of half a point in upcoming meetings as the central bank fights high inflation and raises rates to 2.5 percent as soon as possible.

This was in line with comments from Fed Governor Christopher Waller on Monday.