ASX shares may have to deal with interest rates that go higher than expected. The JPMorgan Chase & Co (NYSE: JPM) CEO Jamie Dimon has warned that interest rates could climb "significantly".
Jamie Dimon has been in charge of JPMorgan Chase for almost two decades. He steered the bank through the GFC and then COVID-19.
Dimon just released his annual letter and his comments about interest rates may be of interest to investors.
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A shift in the economic landscape with interest rates
The JPMorgan Chase CEO wrote that persistent inflation will require rising interest rates and a massive, but necessary, shift from quantitative easing to quantitative tightening.
In the wake of the impacts of COVID-19, the western world, including the US Federal Reserve, took "bold dramatic actions" to combat the impacts of the pandemic. Dimon said that this worked, but the stimulus and quantitative easing may have been too much for too long.
In what could be a warning for the (ASX) share market, Dimon then said:
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) and the stronger the quantitative tightening (QT).
If the Fed gets it just right, we can have years of growth, and inflation will eventually start to recede. In any event, this process will cause lots of consternation and very volatile markets. The Fed should not worry about volatile markets unless they affect the actual economy. A strong economy trumps market volatility.
So, according to Dimon, share markets could become "very volatile".
He went on to say:
The shift from QE to QT will cause a massive change in the flow of funds in and out of Treasury bonds and, therefore, all securities. Our situation today is completely unlike the monetary policy adjustments following the great financial crisis of 2008.
Many ASX shares have already fallen
The prospect of higher interest rates to combat fast inflation has been making headlines for a few months now.
Many Australian companies have already seen sizeable double-digit declines in their share prices in 2022.
The Xero Limited (ASX: XRO) share price is down by 28%, the Aristocrat Leisure Limited (ASX: ALL) share price is down 25%, the REA Group Limited (ASX: REA) share price is down 23%, the SEEK Limited (ASX: SEK) share price is down 15%, the Carsales.Com Ltd (ASX: CAR) share price is down 19%, and the Zip Co Ltd (ASX: Z1P) share price has dropped 66%.
There are plenty of other ASX shares that have also seen a noticeable decline.
Why do interest rates matter?
Legendary investor Warren Buffett once said about interest rates at the 1994 Berkshire Hathaway annual general meeting:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature … its intrinsic valuation is 100% sensitive to interest rates.
