As the Federal Reserve prepares to potentially lower interest rates during its upcoming meeting, JPMorgan CEO Jamie Dimon has raised concerns about the broader state of the U.S. economy, warning that it may still face serious risks.

"We’re not out of the woods yet," Dimon said at the Council of Institutional Investors conference in Brooklyn. "The worst possible outcome would be stagflation—recession combined with higher inflation. I wouldn’t rule it out."

While inflation in the U.S. appears to be easing, offering some relief to consumers and the Fed, concerns about economic instability remain. Recent data shows consumer prices have dropped to their lowest 12-month inflation rate since February 2021, a marked improvement from the 9.1% peak reached in June 2022. Additionally, indicators suggest that inflationary pressures in the supply chain are subsiding, as wholesale price increases are largely under control.

The focus now shifts to how aggressively the Fed should act. Dimon cautions that if the Fed pushes too hard with rate hikes, coupled with increased federal spending and infrastructure investment, it could strain the economy even further.

“These factors are all inflationary in the short term,” Dimon said. “So it’s difficult to conclude that we’re in the clear. I don’t think we are.”

Former Federal Reserve economist Claudia Sahm also weighed in, suggesting that a half-percentage-point rate cut could help stabilize the labor market and prevent further job losses. In an interview with CNBC, she explained that recalibrating policy based on new economic data could help mitigate a potential downturn in employment.

"The labor market has weakened since last July," Sahm said. "A 50-basis-point cut might be necessary, and the Fed should be prepared to take further action if needed."

How Stagflation Could Impact Jobs and the Economy

Dimon’s concerns about stagflation stem from its potential to create prolonged economic hardship that’s difficult to combat with traditional policies. Stagflation, a term coined in the 1970s, describes an economic environment in which high inflation coincides with stagnation and elevated unemployment—a combination that challenges standard monetary and fiscal solutions.

Economists see stagflation as a more severe issue than a regular recession because it can undermine economic growth, hurt the stock market, and reduce the value of retirement savings like 401(k) plans.

In 2022, former Federal Reserve Chairman Ben Bernanke also warned about the risk of stagflation. He noted that, even in a mild scenario, the U.S. could face slow economic growth, rising unemployment, and persistent inflation over the next few years.

In a stagflationary environment, the economy struggles while prices continue to rise, which negatively affects consumers, businesses, and investors. As the cost of goods and services increases, consumers lose purchasing power, reducing their ability to spend. This, in turn, dampens economic activity and exacerbates the downturn.

Businesses, facing higher production costs and lower consumer demand, may see profits decline, which could result in falling stock prices. The job market could also suffer as companies reduce hiring or even lay off workers due to increased costs and decreased demand. For workers, stagflation creates a particularly difficult scenario where the cost of living rises while job opportunities shrink.

Traditional economic tools like lowering interest rates may prove ineffective or even harmful in addressing stagflation, as reducing rates could further fuel inflation.

The Federal Reserve’s meeting, scheduled for September 17-18, is expected to result in at least a 25-basis-point rate cut. However, Sahm and some Wall Street analysts believe a larger, 50-basis-point cut could also be considered.

Credits: Content adapted from Forbes.