JPMorgan's David Kelly Expects Fed To Keep Interest Rates Unchanged After In-Line CPI Report — 'We Essentially Have Got Teflon Inflation In America'

During an interview with Bloomberg, Kelly said policymakers should let inflation cool on its own rather than trying to accelerate the process.

• Kelly pointed to lower tariff costs and an eventual decline in oil prices as factors that could ease inflation.
• He believes that the rate of wage growth is the more apparent reason he does not expect inflation to become entrenched.
• Kelly also said Federal Reserve Chair Kevin Warsh should reflect the consensus within the committee and clearly communicate its thinking to markets.

JPMorgan Asset Management’s Chief Global Strategist, David Kelly, expects the Federal Reserve to leave interest rates unchanged, saying the latest CPI report reinforces a gradual disinflationary trend despite persistent price pressures.

During an interview with Bloomberg, Kelly said policymakers should let inflation cool on its own rather than trying to accelerate the process, arguing that wage growth remains too weak to sustain persistent price pressures.

Kelly Sees ‘Teflon Inflation’ In America

Kelly pointed to lower tariff costs and an eventual decline in oil prices as factors that could ease inflation. However, he believes that the rate of wage growth is the more apparent reason he does not expect inflation to become entrenched, noting that wages have risen less than CPI inflation for four consecutive months.

“American workers can't get a raise. 
And if they can't, you cannot have sticky inflation,” he said.

Kelly said inflation has remained elevated after a series of supply shocks and policy decisions, including the COVID-19 response, the war in Ukraine, tariffs and the Iran war. He said inflation should gradually come down if policymakers back away from some of those pressures.

“We essentially have got Teflon inflation in America… it won’t stick. You could do no good by trying to hurry this process. It’s like an injury. It just heals slowly… if you try and speed it up you’re just going to mess everything up,” he added.

Kelly Says Fed Has A ‘Real Communications Problem’

Kelly criticized what he described as the Fed’s move toward communicating less, saying the central bank has a “real communications problem.” Kelly said Fed Chair Kevin Warsh should reflect the consensus within the committee and clearly communicate its thinking to markets.

“He is going to have to back off a little bit from his very aggressive rhetoric and say and admit and acknowledge there’s some progress in inflation,” said Kelly, while adding that Warsh’s upcoming Jackson Hole speech later this month will be important.

July CPI Comes In Line With Expectations

U.S. consumer prices inched up in July and were in line with expectations, according to the Consumer Price Index (CPI) report released earlier on Wednesday.

Data from the Bureau of Labor Statistics (BLS) showed that CPI rose 0.1% in July on a seasonally adjusted basis, with the annual inflation rate cooling to 3.4% from 3.5% last month.

Core CPI, which excludes food and energy, rose 0.2% in July, in line with expectations, according to MarketWatch data.

The in-line CPI print also resulted in a fall in rate hike odds. According to data from the CME FedWatch tool, the odds of a 25 basis point rate hike in September fell to 37.9% on Wednesday, from 48.4% a day ago and 54.4% a week ago.

At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, gained 0.29%; the Invesco QQQ Trust ETF (QQQ) rose 0.85%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) edged up by 0.09%. Retail sentiment on Stocktwits regarding the S&P 500 ETF was in the ‘neutral’ territory.

The iShares 20+ Year Treasury Bond ETF (TLT) was up 0.11%, while the iShares 7-10 Year Treasury Bond ETF (IEF) gained 0.19%.

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