(Bloomberg) -- Markets may be predicting the end of the Federal Reserve’s tightening cycle, but Jamie Dimon is still telling clients to prepare for a worst-case scenario of benchmark interest rates hitting 7% along with stagflation.

“We urge our clients to be prepared for that kind of stress,” the JPMorgan Chase & Co. CEO said in an interview with the Times of India, saying a hard landing remains a risk for the US economy. 

His comments contrast with the consensus view after 5.25 percentage points of hikes that lifted the benchmark rate to 5.5% — the highest level in 22 years. US policymakers have signaled that rates will need to stay higher for longer to contain inflation, though money markets are pricing in cuts from next year.

The highest forecast in a Bloomberg survey of economists last week was for 6% at the end of 2023.

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“If they are going to have lower volumes and higher rates, there will be stress in the system,” Dimon said while visiting Mumbai for a JPMorgan investor summit. “Warren Buffett says you find out who is swimming naked when the tide goes out. That will be the tide going out.”

Dimon, who has said rates may need to rise further to fight inflation, added that the difference between 5% and 7% would be more painful for the economy than going from 3% to 5% was. 

The US dollar extended its rise on Tuesday, tracking 10-year Treasury yields — which to some extent was driven by hawkish Fedspeak and Dimon’s warning, according to Christopher Wong, Singapore-based FX strategist at Oversea-Chinese Banking Corp.

If the key rate climbed to 7%, it would have serious implications for American businesses and consumers. Already, economists put the probability of a US recession over the next 12 months at 55% — and that’s more optimistic than Bloomberg Economics’ prediction of a slump as soon as this year. 

A rate of 7% would douse recent optimism among Fed officials about their ability to engineer a soft landing in the economy with the unemployment rate still very low at 3.8% and signs of prices easing.

“Going from zero to 2% was almost no increase. Going from zero to 5% caught some people off guard, but no one would have taken 5% out of the realm of possibility,” Dimon said. “I am not sure if the world is prepared for 7%.”

The Fed left the target range for its benchmark rate unchanged in a widely expected move earlier this month, though fresh quarterly projections showed 12 of 19 officials favored another hike this year. One policymaker saw rates peaking above 6%.

Fed Chairman Jerome Powell has said future rate decisions will be based on incoming data.

“The world is certainly not prepared for a 7% Federal Reserve funds rate,” Charlie Jamieson, chief investment officer at Jamieson Coote Bonds, told Bloomberg Television on Tuesday. 

“At that level we would expect that we would have a deflationary asset unwind, it would burst a lot of asset bubbles, it just simply wouldn’t be sustainable.”

--With assistance from Derek Wallbank, Abhishek Vishnoi and Sarina Yoo.

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