David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, stated that the Federal Reserve should maintain its current interest rate policy. He expects inflation to gradually decline as mounting evidence suggests a persistent wage-price spiral will not develop.
Kelly made these remarks in an interview following the release of U.S. July consumer price index data on Wednesday, noting that the report showed a moderate increase in underlying inflation, with U.S. Treasuries retaining their gains after the data release. "They absolutely should stay put, and I actually believe they will do so," he said.
Kelly identified three forces driving a significant pullback in inflation: a year-over-year decline in tariff costs, falling oil prices buoyed by optimism over a potential end to the Iran conflict, and wage growth consistently lagging behind inflation. He added that the latter point prevents price pressures from becoming self-reinforcing and reduces the likelihood of forcing the Fed to raise rates.
"The U.S. is essentially experiencing 'Teflon inflation' right now鈥攊t just doesn't stick," Kelly said. He argued against trying to accelerate the process, comparing it to an injury: "Like an injury, it only heals slowly. Trying to speed it up would only make things worse." He emphasized that a wage-price spiral cannot form without a corresponding response in wages.
Kelly also criticized the Fed's recent communication strategy, labeling the central bank's suggestion to reduce market engagement as "the wrong path." He identified Federal Reserve Chairman Kevin Warsh's upcoming speech at the Jackson Hole symposium in late August as a pivotal moment: "He will have to temper his previously very aggressive rhetoric and acknowledge that inflation has made some progress."
Regarding whether raising interest rates could stabilize long-term Treasury yields by restoring Fed credibility, Kelly described this as a "difficult question to judge." He warned that quantitative tightening is a more dangerous policy tool due to its broader impact on long-term rates, and that combining it with rate hikes could increase the risk of market instability. Given elevated leverage in financial markets, Kelly noted that even a modest rate hike could trigger asset repricing: "If rates rise and short-term rates increase, investors might shift toward safer assets, potentially weakening some of the momentum in the market rally."
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