Fed officials seem ‘completely clueless’ about inflation, say strategists

Julian Howard, lead investment director for multi-asset solutions at GAM, said Federal Reserve officials appear to have “no idea” what’s going on when it comes to the U.S. inflation situation.

His comments come as policymakers have urged patience in cutting interest rates in recent weeks, arguing that inflation has fallen less than previously expected and that the Fed is still too persistent to ease monetary policy. It was served in the middle of nowhere.

“I think it sends a message that they have no idea what’s going on,” Howard said Wednesday on CNBC’s “Squawk Box Europe.”

The Fed declined to comment.

Federal Reserve Director Christopher Waller said Tuesday he needed more data evidence showing inflation is softening before supporting a rate cut.

“Absent a material deterioration in the labor market, we need to see a few more months of favorable inflation data before we feel comfortable supporting an accommodative monetary policy stance,” he said at an event at the Peterson Institute for International Economics in Washington.

Waller’s comments were echoed Tuesday by other Fed officials, including Boston Fed President Susan Collins.

“The data is very mixed and it’s going to take longer than I previously thought,” she said at a conference hosted by the Atlanta Fed. “This is a time when patience is really important.”

But GAM’s Howard said Fed officials haven’t sent a clear message about their expectations or why inflation remains high.

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

“I have a credibility issue, to be honest with you,” Howard said.

Howard explained that policymakers initially suggested that inflation would be contained when it first began to rise, and then inflation spiked.

“and now [policymakers] “Inflation is falling, but we don’t think it’s falling fast enough.”

Data released earlier this month showed the U.S. Consumer Price Index rose to an annual rate of 3.4% in April, down slightly from 3.5% in March and well below the 9.1% 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 seems to have stalled out at around 3.5 percent and everyone is struggling to explain why it’s stalled at 3.5 percent. I think that’s the challenge,” GAM’s Howard said.

He added that the stock market appears to be dealing with rising inflation levels and has also adjusted its expectations for interest rate cuts, now pricing them in more significantly than at the beginning of the year.

Howard attributes the slow market reaction to changes in large-cap stocks. These companies currently hold large amounts of cash and can invest it relatively risk-free in things like short-term government bonds, he said.

“At the top of the market, you’re getting this type of all-weather construction,” Howard said. “If interest rates go down, that’s great for income. … If interest rates go up or don’t go down as expected, that doesn’t matter. [of] The cash levels, the cash levels mean that they’re making this huge amount of money on an annual basis, risk-free.”