The Marriner S. Eccles Federal Reserve Building during a renovation in Washington, DC, USA, on Tuesday, October 24, 2023.
Valerie Plesch | Bloomberg | Getty Images
According to Julian Howard, senior investment director for multi-asset solutions at GAM, Federal Reserve officials appear to have “no idea” what is happening with the inflation situation in the US.
His comments come as policymakers have called for patience on rate cuts in recent weeks, arguing that inflation has fallen less than previously expected and is still too tough for the Fed to handle monetary policy easing could drive forward.
“I think the message that comes across here is that they have no idea what’s going on,” Howard said on CNBC’s “Squawk Box Europe” Wednesday.
The Fed declined to comment.
Fed Governor Christopher Waller said Tuesday he needs to see more data showing inflation is easing before he endorses rate cuts.
“With the labor market not weakening significantly, I need to see several more months of good inflation data before I can support monetary easing,” he said at an event at the Peterson Institute for International Economics in Washington.
Waller’s comments were echoed by other Fed officials on Tuesday, including Boston Fed President Susan Collins.
“I think the data is very mixed … and it’s going to take longer than I previously thought,” she said at an Atlanta Federal Reserve conference. “We’re in a time where patience is really important.”
“A credibility problem”
But Fed officials haven’t offered a clear message about their expectations or addressed why inflation remains high, GAM’s Howard said.
“Inflation is notoriously difficult to predict, and I don’t think they have a real idea of what’s happening,” he noted.
“To be honest, there is a credibility issue,” Howard said.
Policymakers initially indicated that inflation would be subdued when it first started rising, Howard said, explaining that the rate then shot up.
“And now [policymakers] I think inflation is coming down, but it’s not coming down fast enough,” he said.
Data released earlier this month showed the U.S. consumer price index was at 3.4% on an annual basis in April. This was down slightly from March’s 3.5% and well below the 9.1% recorded in June 2022, when the inflation cycle peaked – but also remained above the 2% target Fed.
“Inflation actually started going down, but then it just seems to be stuck at about 3.5%, and everyone is trying to find an explanation for why it got stuck at 3.5%, and I think this is it challenge,” GAM’s Howard said.
He added that equity markets appear to be coping with elevated inflation levels and have also adjusted their expectations for rate cuts, now pricing in far smaller rate cuts than at the start of the year.
Howard attributes the markets’ muted reaction to changes in mega-cap stocks. These companies currently have a large amount of cash that can be invested relatively risk-free, such as in short-term government bonds, he explained.
“They’ve become kind of an all-weather construction at the top of the market,” Howard said. “If interest rates fall, that’s good for income. … If interest rates go up or don’t go down as expected, it doesn’t matter because.” [of] The cash on hand, the cash on hand means that they are making this huge amount of money on an annual basis risk-free.
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2024-05-22 10:56:37
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