JP Morgan's chief strategist: The Federal Reserve should continue to hold steady as inflation will gradually decline; interest rate hikes may trigger asset repricing.

According to the Zhihong Cixiang APP, David Kelly, Chief Global Strategist at JPMorgan Asset Management, stated that the Federal Reserve currently has no need to further raise interest rates and should maintain them at their current levels. As more signs indicate that the U.S. is struggling to create a sustained "wage-price spiral," inflation is expected to gradually decline, and excessive tightening of monetary policy could bring unnecessary shocks to the economy and the financial markets. In an interview after the U.S. Consumer Price Index (CPI) for July was released, Kelly said, "The Federal Reserve absolutely should keep rates unchanged, and I actually think they will do so." Recent data shows that core inflation in the U.S. was relatively mild in July, alleviating market concerns about further tightening by the Federal Reserve. U.S. Treasury bonds maintained their upward trend after the data was released. Kelly believes that U.S. inflation has begun to show a clear trend of gradual cooling, driven primarily by three factors. First, as the base effect from previous tariff increases fades, the impact of tariffs on year-over-year inflation is expected to diminish; second, optimistic expectations regarding the end of the war in Iran are driving oil prices down, which is expected to further ease pressure on energy prices; and third, wages in the U.S. continue to lag behind inflation, meaning that rising wages have not created sustained momentum for companies to raise prices. Kelly pointed out that while U.S. inflation remains high, there is a lack of sustained upward pressure, making it difficult for price pressures to create a long-term entrenched trend. He stated that the Federal Reserve does not need to try to accelerate the decline in inflation through further interest rate hikes. "It's like being injured; you can only recover slowly. If you try to speed up the process, it may make things worse." In his view, as long as wages do not respond strongly and continuously to rising prices, it will be very difficult for the U.S. to create a true wage-price spiral; therefore, a gradual decline in inflation is still the more likely scenario. Kelly also criticized the Federal Reserve's recent communication strategy, believing that Chair Walsh's speech at the Jackson Hole Global Central Banking Conference at the end of August will be an important turning point. Since Walsh took office as Chair of the Federal Reserve in May, he has notably downplayed forward guidance in an effort to reduce the Fed's explicit hints about future policy paths, allowing financial markets to price based more on economic data. He indicated that this direction poses problems and that the Fed's attempt to reduce communication with the market "has gone astray." He anticipates that as the latest inflation data reveals some positive signals, Walsh may need to moderate his previously strong statements during his speech at Jackson Hole and acknowledge that the U.S. has made certain progress in reducing inflation. Regarding whether the Federal Reserve can enhance its credibility in combating inflation through interest rate hikes and thereby stabilize long-term U.S. Treasury yields, Kelly considers this a "very close judgment." Recently, markets have been worried about whether the Federal Reserve possesses sufficient policy credibility in light of inflation remaining above the 2% target for several years. Theoretically, if rate hikes can strengthen investor confidence in the Fed's determination to control inflation, long-term inflation expectations and term premiums could decrease, thereby imposing some constraint on long-term U.S. Treasury yields. However, Kelly believes that compared to interest rate hikes, quantitative tightening (QT) may be a more dangerous policy tool, as reducing the Fed's balance sheet would exert more direct upward pressure on long-term interest rates. If the Fed raises rates while simultaneously ramping up QT, it could increase the risk of financial market instability. Kelly also specifically reminded that the current financial markets are operating with a high degree of leverage; therefore, even a limited interest rate hike by the Fed could have a market impact that exceeds the scale of the policy itself. Should short-term interest rates rise further, investors may be more inclined to shift funds towards safer assets like cash and short-term Treasuries, thereby diminishing the appeal of stocks and other risk assets. Kelly pointed out that if the Fed chooses to raise rates, higher short-term interest rates might enhance investors' willingness to channel funds into safe assets, "which could weaken the momentum for market gains." Overall, Kelly believes that current U.S. inflation is slowly but steadily progressing in the right direction, and as long as wage growth has not created a sustained mechanism for driving price increases, there is no need for the Federal Reserve to hastily tighten policy further. Compared to forcefully accelerating the decline in inflation through rate hikes, maintaining the current interest rates and waiting for existing inflation pressures to gradually dissipate might be the lower-risk policy choice.