JPMorgan strategist expects Fed to keep interest rates unchanged

JPMorgan Asset Management chief global strategist David Kelly said the Federal Reserve should keep interest rates unchanged as several disinflationary forces reduce the risk of a sustained US wage-price spiral.

“Absolutely they should stay on hold, and I actually think they will,” Kelly said Wednesday in a Bloomberg Television interview after the release of July consumer price data. Underlying US inflation was subdued during the month, while US Treasuries held gains after the report.

Kelly said inflation should ease as tariff costs fall on a year-over-year basis, oil prices decline amid optimism for an end to the Iran war, and wage growth continues to lag inflation. He said weak wage growth removes the fuel needed for price pressures to become self-sustaining and force the Fed to raise rates.

“We essentially have got Teflon inflation in America — it won’t stick,” Kelly said. He compared the process to an injury that heals slowly and warned that trying to accelerate it could cause damage.

Kelly criticized recent Fed communications and said Chair Kevin Warsh’s Jackson Hole speech at the end of August will be pivotal. He said Warsh should temper his aggressive rhetoric, acknowledge progress on inflation, and reverse the Fed’s signal that it plans to communicate less with markets.

Kelly called the question of whether a rate increase could restore Fed credibility and anchor long-term yields “a close call.” He said quantitative tightening would be more dangerous because it could push long-term rates higher and destabilize markets if combined with a rate increase.

With financial markets carrying substantial leverage, Kelly said even a modest rate increase could trigger asset repricing as investors move toward safer holdings, taking “some of the wind out of the market sails.”