The Fed could hike rates to an 'Armageddon' level not seen in 22 years, but the effect on stocks wouldn't be catastrophic, JPMorgan says

• The Fed could raise rates to an "Armageddon" level of 6.5%, which hasn't been done since 2000, JPMorgan analysts said. 
• A rate that high would weigh on equities, bonds, and credit, but total downside would remain limited. 
• That's because equities and bonds have already seen big losses in 2022, so another steep decline would be unlikely.

There's an "Armageddon" scenario where the Federal Reserve lifts rates to 6.5%, but the overall downside would be limited for stocks given that they've already seen sizable losses in 2022, according to a JPMorgan note to clients. 

Markets widely expect the Fed to lift rates to about 5%. The last time the fed funds rate hit 6.5% was in 2000, and stocks endured heavy losses after previously soaring amid the dot-com bubble. 

JPMorgan put the odds of rates reaching that level again at 28%. In its hypothetical, the Fed would hike rates to 5% by mid-2023, then keep them steady. But the economy still may not slow enough to lower inflation to its target due strong cash balances among American households, sustained consumer spending, and high corporate profits.

So tightening would have to resume, sending rates toward 6.5% in the second half of the year and resulting in a deep global recession, JPMorgan strategists wrote. This "Armageddon" scenario would conclude with steep Fed easing in 2024.

But the S&P 500 is down about 18% this year, and that should help cushion stocks against further upward surprises on rates, the bank said.

"In our opinion while there is little doubt that scenario 3 would be negative for most asset classes including equities, bonds and credit, the eventual downside is likely to be more limited that an Armageddon would suggest," the note said. "The main reason is that demand for both bonds and equities declined by so much in 2022 that it would be more difficult for another big decline in demand to take place in 2023."