JPMorgan’s Dimon and BlackRock’s Fink warn of ‘higher for longer’ rates

Jamie Dimon and Larry Fink have warned investors to brace for the Federal Reserve keeping interest rates higher for a longer period of time, bucking the view that the central bank will cut rates later in 2023.

The comments from two of Wall Street’s most prominent executives made the case that the collapse of Silicon Valley Bank and broader struggles among regional US banks will not be enough to deter the Fed from keeping rates elevated in its battle to curb inflation.

Dimon, chief executive of JPMorgan Chase, on Friday said there could be consequences for investors and companies which do not prepare for the risk of an extended period of tighter monetary policy.

“They saw what just happened when rates went up beyond people’s expectations. You had the gilt problem in London,” Dimon told analysts on Friday during a call to discuss his bank’s first-quarter results. He was referring to the sell-off of UK government debt last year following a botched budget.

“You had some of the banks here. People need to be prepared for the potential of higher rates for longer,” he added.

Separately, BlackRock CEO Fink said in an interview this week: “Inflation is going to be stickier for longer so the Fed may need to continue to increase 50 or 75 basis points more . . . There’s a lot of stress in the market.”

Results from JPMorgan, the largest US bank by assets, as well as Citigroup and Wells Fargo, underscored how the largest lenders are benefiting from higher interest rates by charging more for loans without passing on significantly higher savings rates for depositors.

But higher rates for longer could prolong the pain for some of the US regional banks, including many due to report earnings next week. They have come under pressure following SVB’s collapse as investors focus on their holdings of long-dated US Treasuries and the loans they made when interest rates were lower.

These assets are now worth less because the Fed rapidly lifted rates over the past 12 months. After three banks failed in a week last month, some customers have pulled money from smaller banks over fears that they may struggle to honour deposits if they have to sell these assets at a loss. If the Fed starts cutting rates, some of those paper losses could be clawed back before assets have to be sold.

The regional banks reporting next week include Comerica, Western Alliance and Zions Bank, all of which had their share prices fall sharply during the turmoil in March.

At its most recent meeting last month, the Fed raised its benchmark policy rate by a quarter-point to 4.75 per cent to 5 per cent. Several Fed officials considered forgoing a rate rise because of the recent stresses in the banking system, which also included Credit Suisse being taken over by local rival UBS.

Markets have for months bet that the Fed will be forced to pump the brakes far sooner than the central bank expects. In the futures market, traders are currently betting the Fed will cut rates to 4.5 per cent by year-end. That implies two rate cuts in the latter half of this year if the central bank raises again in May as expected.

For Wall Street financiers, the key concern is that higher rates for longer, and the stresses at regional banks that lend to many small and local businesses, will constrain lending and do further damage the US economy. Dimon said there will be “a little bit of tightening” but that he “wouldn’t use the word credit crunch” to describe what will happen to bank lending.

“I just look at that as a kind of a thumb on the scale . . . the financial conditions will be a little bit tighter,” Dimon said.

Despite his warnings, the current consensus for a rate cut later this year led JPMorgan to increase its outlook for earnings from lending, known as net interest income, by almost 10 per cent to about $81bn for 2023.

JPMorgan’s rosier forecast is predicated on the fact that a rate cut would reduce the need for it to lift rates for depositors in order to stop them transferring cash to higher-yielding products such as money market funds.

Dimon’s personal view of the trajectory of inflation is in effect at odds with the bank’s forecast, which is based on market pricing.

First-quarter results from the banks on Friday underscored the underlying strength of the US economy and provided another data point that might mean the Fed does not need to lower rates this year.

Citi said its credit card customers spent 7 per cent more in the first three months of 2023 than they did in the first three months of last year.

The bank’s fees from corporate transactions increased 13 per cent from the year-ago period as well, suggesting a continued increase in economic activity. Wells Fargo also reported a continued increase in consumer spending in its credit card business.

Not all Wall Street executives are predicting the Fed will hold firm on rates. Citi chief financial officer Mark Mason told analysts the bank is expecting rates to “flatten” after the second quarter and then trend down towards the end of 2023 to about 4.5 per cent.

Wells CFO Michael Santomassimo said on the bank’s earnings call that, while markets are currently pricing in an interest-rate cut later this year, “I do think that you need to be prepared that that’s not going to happen. And I think it’s possible it doesn’t.”

Additional reporting by Kate Duguid in New York