Damon's Annual Letter: Iran War Could Drive Up Inflation and Interest Rates; Private Lending Does Not Currently Pose Systemic Risk

Ask AI · How specifically would the Iran war affect global supply chains and inflation expectations?

Cailian Press, April 6 (Editor Xia Junxiong) JPMorgan Chase CEO Jamie Dimon warned that the Iran war could trigger a shock in oil and commodity prices, making inflation even more stubborn, and push interest rates to levels higher than what the market currently expects.

In his annual letter to shareholders released on Monday, Dimon made the remarks above. He cited multiple adverse factors, including global conflict, persistently elevated inflation, turmoil in private markets, and what he called “bad banking regulation.”

As the head of the world’s largest bank by market value, Dimon is one of the most outspoken business leaders in the United States. His annual letter not only records the company’s performance, but also provides a macro-level judgment on the global situation.

Just a day earlier, U.S. President Donald Trump stepped up pressure on Iran, threatening that if Iran does not reopen the key Strait of Hormuz, the U.S. will strike its power plants and bridges on Tuesday.

Dimon said: “Today, because of the Iran war, we also face the possibility of continuing major shocks to oil and commodity prices, as well as the reshaping of global supply chains, which could make inflation more stubborn and ultimately keep interest rates higher than the market’s current expectations.”

He said it remains to be seen whether the Iran war can achieve the United States’ goals, while also pointing out that nuclear proliferation remains the biggest risk posed by Iran.

Driven by war-related inflation concerns, the market has basically already ruled out the possibility of the Federal Reserve cutting rates this year.

Last week, the U.S. stock benchmark index S&P 500 posted its worst quarter since 2022. Since late February, the ongoing drag from the war and soaring energy prices has been weighing on it.

Dimon said the U.S. economy is still resilient. Consumers are still employed and still spending, even though it has recently shown some weakening, and companies overall remain healthy.

But he also warned that the U.S. economy previously benefited from massive government deficit spending and stimulus policies, and that demand for infrastructure spending is also rising continuously.

Dimon pointed out that the Trump administration’s “big and beautiful” bill, its deregulatory policies, and capital expenditures driven by artificial intelligence (AI) are all positive factors for the economy.

Private credit may not pose systemic risk

In the letter, Dimon said that although investors have recently pulled back from related funds over concerns that AI development will hit borrowers, the private credit industry “may” not constitute systemic risk.

He noted that the private credit market, with a size of $1.8 trillion, is relatively small. But he also warned that once the credit cycle weakens, losses on various leveraged loans could be higher than expected, because overall credit standards have already been loosened.

Dimon also said that the private credit sector typically lacks transparency, and that loan valuations are not strict enough, which increases the possibility of concentrated selling by investors when the environment worsens.

Last week, asset manager Blue Owl told investors that due to record-high redemption requests in the first quarter, it has limited redemptions for two funds. The market is worried that AI will hit borrowers, leading investors to pull out of its technology-focused funds.

On bank regulation

Dimon also sharply criticized a revised version of capital rules proposed by U.S. bank regulators last month, saying that some of its contents are still “meaningless.”

Last month, regulators proposed so-called “Basel III Endgame” reforms and revised plans for additional capital requirements for global systemically important banks (GSIB).

Dimon said: “While the latest proposal attempts to reduce capital increases compared with the 2023 plan, which is positive, there are still some elements that, frankly, are meaningless.”

He pointed out that with roughly a 5% additional capital requirement, the bank would need to hold “up to 50% more capital” for loans to the vast majority of U.S. consumers and businesses, whereas capital requirements for non-GSIB large banks for similar loans are much lower.

“Frankly, this is not fair, and it doesn’t reflect the spirit of the United States,” Dimon said.

(Cailian Press, Xia Junxiong)