JPMorgan’s David Kelly: The Fed should start cutting rates in June

Well, my next guest says he expects one of the sticking points for the Fed wage inflation to ease in the months ahead. Joining me now, David Kelly, Chief Global Strategist at JP Morgan Asset Management. David, great to see you. Thanks for thanks for joining me. Before we get to the wage inflation point, what did you make of Wallace comments earlier this week? We were talking to James Gorman. He said he wouldn’t be surprised if there was no rate cuts at all. Your expectation of the number of cuts and what would happen to markets if we did indeed get none, I think we probably will get the three cuts. The the Fed is clearly on the tight side of neutral right now. The economy is gradually slowing down and what the economy has proven over the last year is we can have good growth even as inflation comes down. But I think the most important thing to recognize here, which I feel the Federal Reserve has not recognized properly, is that they have really distorted financial markets for many years by keeping rates much too low and then much too high. So, you know, I don’t think about a neutral federal funds rate in terms of the economy. The economy is actually pretty good at looking after itself. What I look for, look for is a neutral rate for financial markets and they really need to move back towards that neutral rate. So so long as the economy is doing OK, so long as inflation is gradually coming down, I think that they should and will cut in June. Presumably, you don’t think at the moment that the rates are too tight for financial markets. We’re at record highs. Gold just hit one as well. Well yes, but well and yes, but that’s that’s sort of a relic of a lot of the liquidity that’s been put into markets in recent years. So you know we’re we’re clearly continuing quantitative tightening trying to mop up some of that liquidity. But in general we’ve we’ve sort of you know there’s been a disconnect between economic performance, earnings performance and markets. We’ve got a lot of inequality in the country which is pouring money into financial assets rather than fueling real investment. So I I can sort of see some of the reasons that we’ve got this, this very boomy stock market here. But nevertheless, I think the Federal Reserve ought to gradually move back towards a normal level of the federal funds rate. And and one factor you think that will allow them to do that is wage inflation. Well, yes, because what’s what’s going on is, is it’s amazing that we don’t have more wage inflation here. Uh, you know we’ve had a tight labor market that everybody’s known about, UH, for the last two to three years. We’ve still got 9 million job openings in this country, which is well above anything we saw before the pandemic and yet wage goes down to about 4.3% year over year. And what I’m seeing is only 6% of the private sector is in a union. There have been zero major strikes so far this year. We’ve had, we’re seeing a lot of immigration coming into the into the country and filling low wage jobs in places like retail and in home care and so forth in daycare. And so I think what you’re going to see is, is pressure from low wage workers holding down wage growth. We’re not really seeing that translate into higher consumer inflation. So I think we’re still on pace for consumer inflation to come down here and the Federal Reserve should stop trying to micromanage the economy. So give me the flip side. What if James Gorman was right or Mr. Waller was right and we didn’t get any cuts at all, Would that destabilize the equity market? It could because what’s what’s going to happen is you know the equity market never stops at the limits of prudence. It stops at the limits of exuberance. And unfortunately what it what it’ll tend to do is it keeps on grinding higher until it is demonstrably very high. We were already at 21 times forward earnings which is rich and particularly some of the biggest stocks are are extremely expensive here. Uh, but it could keep going and the higher it goes, uh, before some shock occurs, but the greater will be the the the decline when that when that shock does occur. Uh, so I I do, you know, I do worry about that down the down the road. I think people need to be diversified here, but I don’t think the Federal Reserve should retry and micromanage that either. I don’t think they’re capable of doing it.