Fed officials seem to have no idea what’s going on with US inflation, strategist says

Federal Reserve officials appear to have “no idea” what’s going on when it comes to the US inflation outlook, according to Julian Howard, chief investment officer for multi-asset solutions at GAM.

His comments come as policymakers in recent weeks have urged patience on interest rate cuts, arguing that inflation has fallen less than previously expected and is still too stable for the Fed to continue easing monetary policy.

“I think the message that’s coming through is that they have no idea what’s going on,” Howard said on CNBC’s “Squawk Box Europe” on Wednesday.

The Fed declined to comment.

Fed Governor Christopher Waller said on Tuesday he needed to see further evidence that inflation was easing before backing rate cuts.

“Absent a significant weakening in the labor market, I need to see a few more months of good inflation data before I feel comfortable supporting an easing of the monetary policy stance,” he said at an event in 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 has been very mixed … and it’s going to take longer than I previously thought,” she said at a conference hosted by the Atlanta Federal Reserve. “We are in a period when patience really matters.”

But Fed officials haven’t come out with a clear message about their expectations or to address why inflation remains elevated, GAM’s Howard said.

“Inflation is extremely difficult to predict and I don’t think they have any real idea what’s going on,” he noted.

“To be honest, there’s a credibility problem,” Howard said.

Policymakers initially suggested inflation would decrease when it first started rising, Howard said, explaining that the rate then rose.

“And now [policymakers] “You think inflation is coming down, but it’s not coming down fast enough,” he said.

Data released earlier this month showed that the consumer price index in the US reached 3.4% for the month of April on an annual basis. That was down slightly from March’s 3.5% figure, and well below the 9.1% reading recorded in June 2022 when the inflation cycle peaked — but also remained above the Fed’s 2% target.

“Inflation started to come down, but then it seems to have just stalled at about 3.5% and everybody’s trying, trying to find a narrative as to why it’s stuck at 3.5% and I think that’s, that’s the challenge,” Howard i GAM. said.

He added that stock markets appear to be dealing with elevated levels of inflation and have also adjusted their expectations for interest rate cuts in price now much less than at the start of the year.

Howard attributes the markets’ muted reaction to changes among large-cap stocks. Those companies currently have high levels of cash that can be invested relatively risk-free, for example in short-term Treasury bills, he explained.

“They’ve become such an all-weather structure at the top of the market,” Howard said. “If rates go down, it’s great for income. … If rates go up or don’t go down as expected, it doesn’t matter because [of] the money level, the money levels mean they’re making this huge amount of money on a risk-free annual basis.”