Hopes that inflation was on a permanent slide back down and the economy was recalibrating itself took a hit this month when the latest price report came in hot, followed by a strong jobs report showing the labor market is still going strong. While more jobs is good news for a lot of Americans, it means the economy is still running hot, a bad sign for reducing inflation. And while J.P. Morgan Chase CEO Jaime Dimon thinks the economy is in a relatively good state, he also thinks the Fed has a hard battle ahead of it to control prices.
The U.S. economy right now is doing quite well. Consumers have a lot of money. Theyre spending it. Jobs are plentiful, Dimon said in an interview with CNBCs Jim Cramer Thursday. Thats today. Out in front of us, theres some scary stuff. You and I know theres always uncertainty. Thats a normal thing.
I have all the respect for Powell, but the fact is we lost a little bit of control of inflation, Dimon said, referencing Fed Chair Jerome Powell.
The Fed has hiked interest rates eight times in the past year in a bid to reduce inflation, bringing year-over-year consumer price increases down from a 40-year high of 9.1% last summer to 6.4% in December. Earlier this month, Powell struck a somewhat optimistic tone by frequently mentioning disinflation, and Fed governor Christopher Waller repeatedly called the most recent economic data good news in a January speech.
But Dimon said interest rates could possibly remain higher for longer as the Fed struggles to bring down inflation, echoing statements by St. Louis Federal Reserve President James Bullard this week, who cited the strong labor market as evidence that the U.S. economy is stronger than we previously thought. The hot economy means there could be a tougher road ahead for disinflation than first thought, Bullard said.
Our risk now is inflation doesnt come down and reaccelerates, and then what do you do? We are going to have to react, Bullard added, signaling that the Fed would not start cutting rates in 2023 as seemed likely only a month ago.
Dimon added that strong consumer spending activity in the U.S. is inflationary, while large government spending programs announced in the past few years, including last years $280 billion CHIPS Act and the $1 trillion infrastructure bill passed in 2021 represent a sea change for the economy. Dimon said acts like the infrastructure bill have a lot of good stuff in it, but added that high amounts of government spending will likely make inflation harder to bring down, potentially creating a much bigger and prolonged challenge for the Fed.
Last year, Dimon warned the U.S. economy had a one in three chance of avoiding a recession, later saying that his bank was preparing for an economic hurricane while cautioning investors to brace for prolonged market volatility. He softened his tone somewhat in January, forecasting a soft landing or a mild recession were more likely than a severe economic downturn, but warned that the U.S. is still faced with a one in three chance of a severe recession.
Dimon was still nervous about the U.S. economys future in an interview with Reuters earlier this month. People should take a deep breath on this one before they declare victory, he said, adding that there is a decent chance the Fed will need to raise rates even further to inflation down to acceptable levels.
In his interview with CNBC on Thursday, Dimon said it could take a while for the Fed to reach its goal of 2% inflation, joining the ranks of other bankers and economists like Mohamed El-Erian who have suggested that attempts to reach that traditional inflation goal post could be what eventually sparks a severe recession.
However, Dimon was careful to add: Well be fine.
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