By Marriner S. Eccles The Federal Reserve Building is under renovation, Tuesday, October 24, 2023, in Washington, DC, United States.
Valerie Plesch | Bloomberg | Getty Images
Julian Howard, chief investment director of multi-asset solutions at GAM, said Fed officials seemed to have “no idea” where U.S. inflation was going.
His comments come as policymakers in recent weeks have urged patience for rate cuts, arguing that inflation has fallen less than previously expected and remains too sticky for the Fed to continue its easy monetary policy.
“I think the message is that they don’t know what’s going on,” Howard said Wednesday on CNBC’s “Squawk Box Europe.”
The Fed did not immediately respond to CNBC’s request for comment.
Federal Reserve Governor Christopher Waller said on Tuesday he would need to see further data evidence that inflation is softening before supporting a rate cut.
“In the absence of significant labor market weakness, I would need to see a few more months of good inflation data before I feel comfortable supporting an accommodative monetary policy stance,” he told an event at the Peterson Institute. International Economics, Washington.
Waller’s comments were echoed Tuesday by other Fed officials, including Boston Fed President Susan Collins.
“I think the data is very complex … and it’s going to take longer than I previously thought,” she told a conference hosted by the Atlanta Fed. “We’re in a period where patience is very important.”
“Credibility Issues”
But GAM’s Howard said Fed officials have yet to send a clear message about their expectations or explain why inflation remains high.
“Inflation is notoriously difficult to predict and I don’t think they really understand what’s going on,” he noted.
“To be honest, there’s a credibility issue,” Howard said.
Policymakers initially said inflation would be contained when it first started rising, Howard said, explaining that rates then spiked.
“Right now (policymakers) think inflation is coming down, but not fast enough,” he said.
Data released earlier this month showed that The U.S. consumer price index in April was 3.4% at an annual rate. That’s down slightly from March’s 3.5% reading and well below the 9.1% reading recorded at the peak of the inflation cycle in June 2022, but still above the Fed’s 2% target.
“Inflation did start to come down, but then it seemed to be stuck at around 3.5%, and everyone is trying to find an explanation for why inflation is stuck at 3.5%, and I think that’s the challenge,” GAM’s Howard said.
He added that stocks appeared to be grappling with rising inflation levels and had adjusted interest rate cut expectations and were now trading at much lower prices than earlier this year.
Howard attributed the lackluster market reaction to changes in large-cap stocks. He explained that these companies currently have higher cash levels and can make relatively risk-free investments, such as short-term Treasury bills.
“They’ve become this all-weather structure at the top of the market,” Howard said. “If interest rates come down, that’s a good thing for revenue…If interest rates go up, or they don’t come down as expected, it doesn’t matter because the cash level, the cash level means they’re making money every year and that’s a huge amount of money that’s risk-free of.
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