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This morning, the focus is on inflation CPI coming in below expectations, tradus adding to bets for two more rate cuts this year, including one next Wednesday. David Kevey of JP Morgan Acid Management joins us. Now for more, David, let's start with the inflation data. Is three the new two? And is it going to stop this Federal Reserve from cunning interest rights?
Well, I think that that's going to keep on cutting rates.
It's generally a better than expected report, but I think what it really shows is we have a K shaped economy, and it's called sort of a K shaped CPI report. The thing that really jumped out of me is, first of all, rental costs coming down. There's you know, we've got a big change in demographics here and rents are Rental inflation is just going away. You also saw use vehicle prices full, although it's pretty interesting. And then the big thing here is core goods prices outside of food
and energy. That's the stuff that should be hit by tariffs, but that's only up two tens of percent of one and a half percent year over year. It is clear that mainstream retailers don't believe they can pass on the tariff increases right now, and that's what's making this inflation rate a little bit tamer than people feared.
David doesn't just justify what the market's already sussed out, which is that inflation fears were overblown earlier this year. The Fed can keep cutting potentially below three percent by the end of next year, and that it's not going to cause a huge inflation problem.
Well, I never thought we had a long term inflation problem, but I think it is still early days on the tariff effects. So what's going to happen is right now retailers feel like they can't pass on the price increases. But early next year you're going to have this refund bonanza. The average incompact refund per household, we believe it's going
to be able four thousand dollars. Last year is thirty two hundred dollars, and that is the exact time when retailers are going to feel like they can pass on these tariff increases. So I do think we've got a little bit of a spurred in tarifflation still to come. But then you know, if nothing else happens, there isn't a lot of momentum in this economy, and it'll slow down again, and it'll cool down again. So I don't
think we've got a long term inflation problem. My real question is, given how bubbly financial markets are, do you really need the Federal Reserve adding more liquidity to the party right now? Or should they just hang on in there and say this is enough liquidity?
What are you saying? What are you seeing that really is bubbly given the fact that earnings have exceeded expectations, the forecasts have exceeded expectations, and we're likely to see more of the same next week with the tech earnings.
Well, well, valuations are extremely high for the over now. Obviously it's a lot of it's concentrated in the meya cap stocks, but also profits is a share of GDP are extraordinarily high. So overall, the total valuable US market cap is about three hundred and sixty five percent of GDP right now. It was about two hundred and twelve percent before the tech bubble bursts back in two thousand. It was eighty seven percent before the eighty seven stock
market crash. So there's you know, it's leverage upon leverage, high pe ratios on a very high level of earnings relative to GDP. Now, I still think this is a very good economy for equities, but I wouldn't say that you could call the market depressed at this stage. I think that, you know, one of the dangers here is that everybody gets out over their skis and then you have a significant market correction or a bear market.
So are you talking about potentially if the Fed is cutting into strength, they'll be making an error this month.
Yeah, because it's a different economy. And we keep on talking about the Fed's going to tighten to lower inflation. Forget about it. The Federal reserves, short term magistrates, are not impacting growth, they're not impacting inflation, but they are impacting financial markets. And the big problem that we've had in this century of the two thousands hasn't been CPI inflation getting getting out of hand. It's asset bubbles, you know,
whether it's housing bubbles or tech bubbles. And the Federal Reserve should not be in the business of blowing up bubbles. So I think they should, you know, just take it. I don't mind if they cut rates a little bitier, but I certainly would have a problem if they cut rates below what they think neutral is if the economy is you know, it is not threatened by a recession, because we are we are seeing money go into financial markets,
go into financial assets, and just not come out. And it's sort of it's kind of like a stuck valve, and the more more money goes in, the more this this market just seems to accelerate upon itself.
And David, if we ask Governor Wall of this question when he was on the program last week, we asked whether he was getting lved into kind of interest rates and potentially reducing financial markets. David, do you think there's a problem with their interpretation of the dual mandate or just the dual mandate?
I think the dual mandate itself.
I think that I think that if you if you they need Congress needs to recognize, they need to recognize that monetary policy has significant impacts on financial conditions and therefore maintaining stable financial conditions should be part of the goal. It's it's kind of like with the ECB for years decided they didn't they weren't supposed to interview if one particular country got into significant dec coomic distress.
And destabilize the eurosystem.
And then finally Mario drag He said, look, if Greece is a problem, we're going to do something about Greece. Well, this is a similar situation where the mandate needs to be expanded a little to recognize the impact of FED policy on financial and other asset price bubbles, to try to prevent bubbles or busts, because of.
Course that's why bubble creates.
A bus and you want to have financial market stability, not just economic stability, and I think the Federal Reserve kind of have an impact on that.
David, this was thoughtful. We appreciate your time. David Kelly there of JP Morgan Asset Management,