JP Morgan Chase (JPM) said in a report to clients that the Federal Reserve (Fed) is likely to raise interest rates to 6.5%, the first time in 22 years. but. Given that US stocks have already experienced considerable declines in 2022, the downside is limited.
JPMorgan estimates that the Fed has a 28% chance of raising interest rates to 6.5%. The Fed is now widely expected to raise interest rates to around 5%, up from 6.5% last hit in 2000, when stocks were battered during the dot-com bubble.
JPMorgan pointed out in the report that the Fed may raise interest rates to 5% in mid-2023 and then keep interest rates unchanged. But with U.S. households flush with cash, consumer spending steady and corporate earnings buoyant, the slowdown may still not be slow enough to bring inflation down to the Fed’s target.
Therefore, the Fed may have to return to tightening policy, raising interest rates once more to 6.5% in the second half of the year, and causing the global economy to plunge into a deep recession. This “end of the world” scenario would end with the Fed implementing massive policy easing in 2024, Jr. noted.
However, the bank also said that the S&P 500 has fallen regarding 18% this year, which should help cushion once morest further unexpected rises in interest rates.
“While the above scenario is indeed negative for most asset classes, including stocks, bonds and credit, in our view, the eventual decline is not expected to be as severe as the end of the world, mainly because the demand for bonds and stocks in 2022 is low. It has fallen so much that it will be difficult to see a similar sharp drop in 2023,” the report said.
