- The US economy is healing, but the path forward remains uncertain, JPMorgan CEO Jamie Dimon said in his annual letter to shareholders.
- Unprecedented stimulus, the Fed's fight with inflation, and the Russia-Ukraine war all pose major risks.
- The three events "present completely different circumstances" to what economists have seen before, Dimon said.
The current rebound is unlike any seen in modern history. That's both a good and a bad thing, JPMorgan CEO Jamie Dimon said Monday in his latest annual letter to shareholders.
The US is squarely in recovery mode, but several factors make the path forward hard to see. The war in Ukraine and related sanctions against Russia quickly lifted commodity prices and risk keeping inflation permanently high. Massive government stimulus fueled a rebound of unprecedented speed. And as inflation looms large, the Federal Reserve is embarking on a tricky mission to cool price growth without starting a new recession.
These three factors are "unique" in their own rights, Dimon said. It's possible that all the events have "peaceful resolutions," but the US should also prepare for worse outcomes and some turbulence on the way to a full recovery, he added.
"They present completely different circumstances than what we've experienced in the past – and their confluence may dramatically increase the risks ahead," Dimon said.
Here's why Dimon sees each of the three aforementioned factors bringing new risks to the US's rebound.
Trillions and trillions of stimulus dollars
The government deployed previously unthinkable amounts of cash to keep the economy afloat during the pandemic. Stimulus packages signed by President Donald Trump and President Joe Biden amounted to roughly $5 trillion in aid, and emergency asset purchases conducted by the Fed pumped another $4.4 trillion into the economy.
The programs stabilized markets, saved small businesses, accelerated rehiring, and helped the economy rebound extremely quickly in 2021 even as the Delta and Omicron waves slammed the US. They also helped bridge the period during which COVID-19 vaccines were being developed, leaving Americans ready and willing to boost the economy once it reopened.
Yet the country is now paying the price for its unprecedented rescue packages. Fiscal stimulus "has been and always will be inflationary," Dimon said. Headline inflation measures show prices rising at the fastest pace since 1982, and there haven't been any major signs of the rally slowing. The pace should cool as the global economy heals, but the path of inflation will remain murky throughout 2022, Dimon said.
"While clearly some of this rise is transitory due to supply chain shortages, some is not, because higher wages, higher housing costs, and higher energy and commodity prices will persist," he added.
The Fed's plans for a 'soft landing'
Some of the inflation cooldown will come from the Fed, but how the central bank handles that is another unknown.
The Fed raised its benchmark interest rate in March, starting a cycle that will lead to higher borrowing costs and, if all goes according to plan, weaker inflation. It's also poised to start reducing its holdings of Treasurys and mortgage-backed securities, the same assets the Fed was scooping up at the start of the coronavirus recession.
Managing both programs will be a precarious balancing act for the central bank. Raising rates and offloading assets too quickly could remove support before the economy is fully healed and start an entirely new recession. Yet moving too cautiously could keep inflation soaring higher. With the Russia-Ukraine conflict adding yet another variable to the Fed's decision-making process, the central bank's tightening plan will almost certainly look extremely different from previous ones, Dimon said.
"The Fed needs to deal with things it has never dealt with before (and are impossible to model), including supply chain issues, sanctions, war and a reversal of QE in the face of unparalleled inflation," Dimon said. "The data will likely continue to be inconsistent and volatile — and hard to read."
The war in Ukraine and sanctions on Russia
Russia's invasion of Ukraine is the most obvious factor that makes today's economy so murky. The conflict, while largely confined to Ukraine's borders, has sent shockwaves throughout the global economy. Sanctions against Russia have effectively removed the country from the world's financial system, leading to a major devaluation of the ruble and forecasts of economic disaster.
The US, UK, and EU have also moved to dramatically cut their use of Russian energy commodities like crude oil and natural gas. That sparked a sharp rally for energy prices, including higher gas costs at the pump. Though Biden has announced plans to pad against additional price hikes, the gap between oil supply and demand still risks exacerbating inflation.
Other key commodities like wheat and fertilizer have also seen prices soar in connection to the invasion. The increases have raised concerns of famine shocks in developing countries less equipped to handle pricier food.
JPMorgan's own forecasts see the conflict slowing US economic growth to 2.5% in 2022 from 3%, but even that estimate is cloudy, Dimon said. The projections are only based on the sanctions in place today and a "fairly static" view of the conflict. Should the situation worsen, the consequences stand to be much more negative, the CEO said.
"Many more sanctions could be added — which could dramatically, and unpredictably, increase their effect," Dimon said. "Along with the unpredictability of war itself and the uncertainty surrounding global commodity supply chains, this makes for a potentially explosive situation."