Earlier this month, JPMorgan Chase (JPM 2.51%) Chief Executive Officer Jamie Dimon got a lot of attention when he told a group of investors and analysts that "you'd better brace yourself" for a potential economic "hurricane." Dimon has issued warnings for over a year, telling investors about the growing threat of inflation and rising interest rates.
As CEO of the largest U.S. bank, Dimon presents a unique insight into consumer spending and borrowing that can lend perspective to the broader economy. Here's why you should consider Dimon's comments and understand what the bank is doing to prepare.
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Jamie Dimon's evolving concerns
Dimon expressed concern last year about the possibility that inflation could get out of hand, forcing the Federal Reserve to raise interest rates quickly. He was proven correct, and the Fed has increased interest rates in its three meetings since March, bringing the federal funds rate from near-zero up to 1.75%.
Target Federal Funds Rate Upper Limit data by YCharts.
One of the Fed's emergency measures when the pandemic first emerged was quantitative easing (QE) -- it purchased U.S. Treasury notes, mortgage-backed securities, and other assets, which had the effect of pushing down interest rates.
Now the Fed is reversing this program, a process known as quantitative tightening (QT), which is where Dimon's concerns now lie. QT began this month, and the Fed plans to reduce its balance sheet by $95 billion per month. Dimon said, "we've never had QT like this, so you're looking at something you could be writing history books on for 50 years." QE tends to provide liquidity to markets, so it is expected that QT would have the opposite impact, and when coupled with rising interest rates, stocks with high valuations could continue to take a hit.
US Total Assets Held by All Federal Reserve Banks data by YCharts.
How JPMorgan is preparing
Dimon said that banks with a "fortress balance sheet" and conservative practices could weather a market downturn. Banks can do this by having enough cash, not taking on too much leverage, and maintaining solid margins.
JPMorgan Chase has been preparing by freeing up capital and effectively stockpiling cash to position itself for rising interest rates. At the end of the first quarter, the bank had $625 billion in cash and cash-like assets, up 24% from last year, that it can put to work making loans that earn higher interest rates.
Dimon also said the bank could shed nonoperating deposits to free up more capital so the bank could continue to serve clients if times get bad. The bank has also shied away from servicing Federal Housing Administration (FHA) loans, where Dimon thinks delinquencies could hit 5% to 10% in a worst-case scenario.
Dimon told investors that "we're not wishful thinkers" and that "we want it to turn out well, but we can handle all of that." However, as JPMorgan Chase strives to be a "port of safety" for investors, it must be aware of all the risks posed to the bank and be ready to step up if those worst-case scenarios play out.
