Jamie Dimon says the Fed will raise rates much more than markets currently expect, if there's a strong recovery

• Jamie Dimon said a stronger recovery could see the Federal Reserve hike rates more than the market expects.
• The Fed should break with its pattern of limiting hikes to 25 basis points, and raise rates as much as needed, he said.

JPMorgan Chase CEO Jamie Dimon said the Federal Reserve could raise interest rates by more than markets currently expect, if the US economic recovery is strong.

The US central bank plans a series of at least seven rate hikes this year to tackle red-hot inflation, and it has said it will cut its balance sheet and wind down its asset buying.

But some analysts are worried its policymakers could tip the US into a recession as they withdraw support for the economy.

"I do not envy the Fed for what it must do next: The stronger the recovery, the higher the rates that follow (I believe that this could be significantly higher than the markets expect)," JPMorgan CEO Dimon said in his annual letter to shareholders on Monday.

The Fed in March hiked rates for the first time since 2018, by 25 basis points — its normal level of increment. It hasn't lifted rates by more than one-quarter percentage point since May 2000.

But the strongest inflation in 40 years has prompted its officials to think again, and markets now expect a 50 basis point hike in May, and another the same size in June. And at the weekend, San Francisco Fed President Mary Daly told the Financial Times the case has grown stronger for increasing interest rates by 50 basis points at the May meeting.

Dimon said the Fed shouldn't restrict itself to its usual approach to size and rhythm of rate hikes, but should meet the needs of the situation.

"One thing the Fed should do, and seems to have done, is to exempt themselves — give themselves ultimate flexibility — from the pattern of raising rates by only 25 basis points and doing so on a regular schedule," he said.

"And while they may announce how they intend to reduce the Fed balance sheet, they should be free to change this plan on a moment's notice, in order to deal with actual events in the economy and the markets."

"A Fed that reacts strongly to data and events in real time will ultimately create more confidence. In any case, rates will need to go up substantially."

The central bank's current target range for interest rates is between 0.25% and 0.50%, and another six hikes at 25 basis points would bring that to between 1.75% and 2% by the end of 2022. But the market is pricing in between 2.5% and 2.75%, going by fed funds futures markets.

If the Fed does a good job, there will economic growth and declining inflation for years, Dimon said. That could drive volatility in markets — but that shouldn't necessarily concern policymakers.

"The Fed should not worry about volatile markets unless they affect the actual economy. A strong economy trumps market volatility," he said.

There are hopes in the market for a Fed "put" — the idea the central bank will intervene to limit a slide in stocks once they fall to a certain level, according to Morgan Stanley's Lisa Shalett.

Dimon said the Fed's move from quantitative easing (QE) to quantitative tightening (QT) will trigger a significant change in the flow of funds, which will have massive impacts on the market and economy.

"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," he said.

The combination of the recovery from the coronavirus pandemic, sky-high inflation, and the war in Ukraine "dramatically increase the risks ahead," Dimon said.