JP Morgan Chase (JPM) said in a client report that the Federal Reserve (Fed) is likely to raise interest rates to 6.5%, for the first time in 22 years. but. Given that US stocks have already seen significant declines in 2022, the downside is limited.
JPMorgan estimates 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 the 6.5% last achieved in 2000, when stocks were hit during the dot-com bubble.
JPMorgan pointed out in the report that the Fed could raise interest rates to 5% in mid-2023 and thus keep interest rates unchanged. But with US households flush with cash, consumer spending stable and corporate earnings buoyant, the slowdown may not yet be slow enough to bring inflation below the Fed’s target.
Therefore, the Fed may have to re-tighten policy, raising interest rates again to 6.5% in the second half of the year and plunging the global economy 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 is down about 18% this year, which should help protect against further unexpected hikes in interest rates.
“While the above scenario is indeed negative for most asset classes, including equities, bonds and credit, in our view, the eventual decline should not be as severe as the end of the world, mainly because demand for bonds and stocks in 2022 are low. It has declined so much that it will be difficult to see a similar decline in 2023,” the report said.
