The chief executives of two of Wall Street’s leading investment banks are at odds over by how much more the US Federal Reserve will need to raise rates to get a grip on inflation.
In separate interviews on Thursday, Jamie Dimon of JPMorgan and James Gorman of Morgan Stanley laid out divergent views about the persistence of US price pressures and what more the Fed must do after its most aggressive tightening campaign since the early 1980s.
Dimon took a more hawkish position and said the Fed would need to lift its benchmark policy rate above 5 per cent in light of inflation, which he said would be more persistent than expected.
“I actually think rates are probably going to go higher than 5 per cent . . . because I think there’s a lot of underlying inflation, which won’t go away so quick,” he told CNBC at the World Economic Forum in Davos, Switzerland.
In separate remarks last week, Dimon said the federal funds rate may even need to rise to 6 per cent. His concern is that some of the drivers that have helped to bring inflation down recently, including lower energy prices and slow growth across China owing to Covid lockdowns, may be temporary.
By contrast, Gorman told CNBC that inflation had “clearly” peaked and that rates hitting 6 per cent would be “surprising”. He predicted a scenario where the Fed would lift rates by 25 basis points at its next two meetings, and then pause to assess the impact of tighter monetary policy on the economy.
“I’ve been in a happy land of four, four and four — roughly 4 per cent unemployment, 4 per cent inflation, 4 per cent rates,” Gorman said.
“Rates will be a little higher. Employment at this stage is a little lower, and inflation has been higher. But if we get in that kind of zone, we can deal with it. That would be an appropriate time to pause.”
Their comments come as the Fed is preparing to again slow down the pace of its interest rate increases and deliver a quarter-point rate rise on February 1, after its next two-day meetings. Such a move would lift the federal funds rate to a new target range of 4.5 per cent to 4.75 per cent.
But despite a slower pace, which would mark a departure from the half-point and 0.75 percentage point moves the Fed employed last year, officials have underscored that the central bank is not yet done with its monetary tightening plans even as economic activity more notably slows and inflation eases.
Most policymakers still support the policy rate surpassing 5 per cent, backing projections released in December that showed the median estimate for the fed funds rate peaking between 5 per cent and 5.25 per cent this year.
No official has endorsed rate cuts in 2023, in stark contrast to market pricing, which shows traders expect roughly half a percentage points’ worth by year-end.
