Direct Connect, ah, learned through the app that David Kelly, chief global strategist at J.P. Morgan Asset Management, said that there is currently no need for the Federal Reserve to raise interest rates further and should continue to keep interest rates unchanged. As there are more and more signs that it is difficult for the US to form a sustainable “wage-price spiral,” inflation is expected to gradually fall, and excessive tightening of monetary policy may have an unnecessary impact on the economy and financial markets.
Kelly said in an interview after the release of the US Consumer Price Index (CPI) for July on Wednesday: “The Federal Reserve should definitely keep interest rates unchanged, and I actually think they will.”
According to the latest data, the US core inflation performance in July was relatively moderate, easing market concerns about the Federal Reserve's further tightening policy to a certain extent. US Treasury bonds maintained their upward trend after the data was released.
Kelly believes that US inflation has shown a clear gradual cooling trend, which is mainly driven by three factors.
First, as the base effect caused by previous tariff increases gradually subsides, the driving effect of tariffs on year-on-year inflation is expected to weaken; secondly, the market's optimistic expectations of the end of the Iran war are driving oil prices down, which is expected to further ease the pressure on energy prices; third, the US wage growth rate continues to lag behind inflation, which means that wage increases have not formed a continuous impetus to further increase corporate prices.
Kelly pointed out that although US inflation is still at a high level, it lacks momentum to continue to rise, making it difficult for price pressure to form a long-term solidification trend.
He said there is no need for the Federal Reserve to try to accelerate the decline in inflation by raising interest rates further. “It's like an injury; it only slowly heals. Trying to speed up the process might just make things worse.”
In his view, as long as wages do not respond continuously and strongly to rising prices, it is difficult for the US to form a true wage-price spiral, so it is still more likely that inflation will gradually cool down on its own.
Kelly also criticized the Federal Reserve's recent communication strategy, and believes that Federal Reserve Chairman Walsh's speech at the Jackson Hole Global Central Bank Annual Meeting at the end of August will be an important point.
Since becoming the chairman of the Federal Reserve in May, Walsh has clearly downplayed forward-looking guidance, hoping to reduce the Fed's clear hints on future policy paths and allow financial markets to set their own prices more based on economic data.
He said there is a problem with this direction, and the Federal Reserve's attempt to reduce communication with the market “went the wrong way.” He expects that as the latest inflation data sends a certain positive signal, Walsh may need to moderately ease his previous tough stance during his speech at Jackson Hole, and acknowledged that the US has made some progress in reducing inflation.
Kelly believes this is a “very close judgment” on whether the Federal Reserve can raise interest rates to strengthen its credibility in fighting inflation and use this to stabilize long-term US bond yields.
Recently, the market has been worried about whether the Federal Reserve has sufficient policy credibility when inflation is above the 2% target for many years. Theoretically, if interest rate hikes strengthen investors' confidence in the Federal Reserve's determination to control inflation, long-term inflation expectations and term premiums may fall accordingly, thereby limiting long-term US bond yields.
However, Kelly believes that compared to interest rate hikes, quantitative austerity (QT) may be a more dangerous policy tool because reducing the Fed's balance sheet will put more direct upward pressure on long-term interest rates. If the Federal Reserve simultaneously raises interest rates and increases drastic austerity, it may increase the risk of financial market instability.
Kelly also specifically warned that currently there is a high degree of leverage in the financial market, so even if the Federal Reserve only raises interest rates once, it may have a market impact that exceeds the policy range itself.
If short-term interest rates rise further, investors may be more inclined to shift capital to relatively safe assets such as cash and short-term treasury bonds, thereby weakening the appeal of stocks and other risky assets.
Kelly pointed out that if the Federal Reserve chooses to raise interest rates, higher short-term interest rates may increase investors' willingness to switch to safe assets, “which may weaken the upward momentum in the market.”
Overall, Kelly believes that current US inflation is slowly but continuously moving in the right direction, and there is no need for the Federal Reserve to rush to further tighten policy when wage growth does not form a mechanism to continuously push prices up. Compared to forcibly speeding up the decline in inflation through rate hikes, continuing to keep interest rates unchanged and waiting for the current inflationary pressure to gradually subside may be a less risky policy choice.