Jamie Dimon, the billionaire CEO of JPMorgan Chase, shares something in common with me: We both believe that a 5% target of the federal funds rate may not be enough to quash the highest inflation in 40 years.
Prior to the Federal Reserve‘s final meeting of the year, in which it’s projected to increase interest rates at a slower pace than they have been for the second half of this year, Dimon told CNBC that he foresaw the Fed holding rates at 5% for about three to six months, but he warned, “That may not be sufficient.” Furthermore, Dimon dug into the less publicized machinations of the Fed, its bond-buying (and now, selling) program.
“I think that you have to look at the [10-year Treasury yield]. The other risk we have is quantitative tightening,” Dimon said. “We’ve never had it before ever in the lifetime of mankind, so I look at that as something we should be quite concerned about. And you know, so this suppression of the 10-year bond rates has been going on for 20 years, and it can’t really be suppressed anymore.”
As you may recall, in the middle of the Great Recession in November 2008, the Fed began its unprecedented experiment of quantitative easing. Over a decade of bond-buying and keeping interest rates at or near zero, an unprecedented and obviously unwise judgment given that it coincided with the longest bull run in history, helped double the money supply from 2008 until March 2020. Then, during the pandemic, the Fed went into overdrive, using quantitative easing to help the government borrow money essentially for free. From March 2020 to the apex of the money supply, March 2022, the money supply expanded by 34%.
The quantitative tightening that Dimon is referring to has only contracted the money supply by a little more than a percentage point since March, and already, we’ve seen it wreak havoc on the markets. Coupled with inflation eviscerating savings, consumers are feeling real pain from their paychecks, shrinking in real terms, and their retirement funds, shrinking both in real and nominal terms.
For more of my analysis of the risks of a recession and quantitative tightening, watch the latest episode of the Washington Examiner’s new series, “Straight Up with Tiana Lowe.”