Fed officials appear to have “no idea” about inflation, the strategist says

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

His comments come as he has urged policymakers in recent weeks to be patient with interest rate cuts, arguing that inflation has fallen by less than previously expected and remains too challenging for the Fed to move forward with easing monetary policy.

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

The Federal Reserve declined to comment.

Federal Reserve Governor Christopher Waller said Tuesday he needs to see more data proving that inflation is falling before supporting interest rate cuts.

“Absent significant labor market weakness, I need to see several more months of good inflation data before I feel comfortable supporting an easing of the monetary policy stance,” he said during an event at the Peterson Institute for Economic Studies. International Economics in Washington.

Other Fed officials echoed Waller's comments on Tuesday, including Boston Fed President Susan Collins.

“I think the data has been very mixed… and it will take longer than I previously thought,” she said at a conference hosted by the Federal Reserve Bank of Atlanta. “We are in a period where patience is really important.”

Fed officials have not come out with a clear message about their expectations or addressed why inflation remains high, the Fed's Howard said.

“Inflation is hard 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 issue,” Howard said.

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

“Now (policymakers) believe that inflation is falling, but it is not falling fast enough,” he added.

Data released earlier this month showed that the US CPI came in at 3.4% for April on an annual basis. This was a slight decline from the March figure of 3.5%, and well below the 9.1% reading recorded in June 2022 when the inflation cycle peaked — but it was also still above the Fed's 2% target.

“Inflation has started to come down but it seems like it's just stopped at about 3.5% and everyone is trying, struggling to find an explanation as to why it stopped at 3.5% and I think that's the challenge,” GAM's Howard said.

He added that stock markets appear to be dealing with higher levels of inflation and have also revised their expectations to cut interest rates to a much lower rate than they were earlier in the year.

Howard attributes the weak reaction from markets to changes in mega-cap stocks. He explained that these companies currently have high levels of cash, and can be invested relatively without risk, for example in short-term treasury bills.

“They've become this kind of all-weather structure at the top of the market,” Howard said. “If interest rates go down, that's great for revenue. … If interest rates go up, or don't go down as expected, it doesn't matter because (of) the level of cash, the cash levels mean they're making this huge amount of money on an annual basis.” Risk-free.”