There is growing debate over whether the U.S. economy is on its way to a reckoning. Some worry that sticky inflation due to newly instituted tariffs will cause households and companies to retrench, sending the economy into stagflation, or worse, recession.
Others worry that America’s seemingly insatiable appetite for spending has us on an unsustainable path. Eventually, investors will stop buying our debt, causing interest rates and our deficit to swell even more.
Related: JPMorgan updates Fed interest rate cut outlook
Among those sending warning messages are some of the most influential capitalists of our time, including Ray Dalio, Stanley Druckenmiller, and Paul Tudor Jones. Each is a legendary hedge fund manager with over forty years of experience navigating markets and the economy, and all three have said they’re concerned with the growing U.S. debt pile.
They’re far from the only ones raising a red flag over the risks.
JP Morgan’s influential CEO Jamie Dimon has joined the chorus, raising the specter of another potentially underappreciated risk to our economy.
Jamie Dimon, chief executive officer of JPMorgan Chase & Co., sees a looming threat to the US economy in the bond market.
The Fed takes a holding pattern as economic uncertainty accelerates
In 2020, the Fed and Congress unleashed a torrent of monetary and fiscal support to keep America from falling into a COVID-driven depression.
Zero-interest rate policy, or ZIRP, and multiple stimulus payments worked, accelerating GDP sharply out of its steep downturn. However, the spending tsunami also unleashed inflation, which rocketed up to 8% in 2022.
Related: Housing market chief Pulte sends blunt message on Fed interest rate cuts
Soaring inflation surprised the Fed, given that Fed Chair Powell infamously called it transitory. Eventually, he was forced to embrace the most hawkish pace of Fed interest rate hikes since the 1980s to get inflation under control.
Powell’s war on inflation successfully wrestled inflation back below 3%. However, progress has slowed and higher rates have taken a bite out of the jobs market, given that unemployment has edged up to 4.2% from 3.4% in 2023.
The Fed switched gears again to shore up the jobs market, cutting interest rates last September, November, and December. However, those cuts have yet to boost employment, and the Fed has shifted to the sidelines on additional cuts this year amid growing concern that new tariffs may reignite inflation in the second half of 2025.
This dynamic has lodged the Fed firmly between a rock and a hard place. It cannot raise rates without risking recession if inflation rises, or cut rates without risking inflation if unemployment continues climbing.
The situation has drawn fierce criticism from President Donald Trump, who referred to Powell as Mr. Too Late last month, arguing rates should be cut now, not later. Others in the administration, including Treasury Secretary Scott Bessent and FHFA housing chief Bill Pulte, have similarly argued for rate relief.
Businesses face another risk if bond market staggers
The economic uncertainty has caused Treasury Bond yields to increase this year, despite the Fed’s cuts late last year.
For example, the 10-year Treasury Note yield has risen to nearly 4.5% from below 3.7% last September. The rising yields are good news for those pocketing higher yields from money market accounts or Treasury bond portfolios. But they’re downright bad news for just about everyone else, especially those with credit card debt or would-be homebuyers shopping for a mortgage.
Related: Jamie Dimon sends terse message on stocks, economy
The uncertainty associated with the economy has also started to impact household and business spending decisions.
Consumers are shifting spending to essentials and pausing discretionary purchases. Meanwhile, businesses are rethinking expansion plans while they await trade negotiation outcomes.
The dynamic may worsen if bond markets get unhinged.
In good times, companies (and the rest of us) pay a smaller percentage spread to Treasury yields to borrow, keeping our costs low.
In bad times, the spread widens, increasing costs, sometimes to a point where it forces tough decisions, like forgoing a purchase or business investment.
A widening of credit spreads appears to be firmly on Jamie Dimon’s mind. His role at the largest U.S. and fifth-largest global banks by assets gives him unprecedented insight into what’s keeping business leaders awake at night.
“If people decide that the U.S. dollar isn’t the place to be, you could see credit spreads gap out; that would be quite a problem,” said Dimon in an interview with Fox Business.
A “gap out” would mean a widening in the interest borrowers pay above Treasuries. The implications of wider spreads would be far-reaching, especially if spreads widen as Treasury yields rise because buyers are wary.
“It hurts the people raising money. That includes small businesses, that includes loans to small businesses, includes high yield debt, includes leveraged lending, includes real estate loans. That’s why you should worry about volatility in the bond market,” said Dimon.
Dimon didn’t set a clock to when such a widening may happen, but his range of possibilities includes later this year.
“It’s a big deal, you know it is a real problem,” said Dimon. “I don’t know if it’s six months or six years.”
The federal government’s budget deficit is running at roughly $2 trillion annually.
Dimon has a simple solution to reduce the risk that a loss of confidence will have ripple effects throughout the government and corporate bond market: Grow the economy.
“The real focus should be growth, pro-business, proper deregulation, permitting reform, getting rid of blue tape, getting skills in schools, get that growth going – that’s the best way,” said Dimon.
Related: Veteran fund manager who predicted April rally updates S&P 500 forecast
