Hiking Rates Will Only Make Things Worse! JPMorgan Strategist Warns Fed Against Hasty Moves

David Kelly, Chief Global Strategist at JPMorgan Asset Management, stated that the Federal Reserve (Fed) should hold interest rates steady—and will likely do so—as U.S. inflation is clearly moving toward disinflation, with diminishing risks of a persistent wage-price spiral.

U.S. core inflation in July came in moderate, sending U.S. Treasuries higher after the data release. In an interview with Bloomberg Television, Kelly said the Fed "absolutely should" keep rates unchanged. Attempting to accelerate disinflation through rate hikes would not only bring no benefit but could also harm the economy and financial markets.

Kelly believes three forces are jointly driving inflation lower. First, the year-on-year impact of tariff costs is gradually fading. Second, market optimism over an end to the U.S.-Iran conflict could lead to lower oil prices. Third, wage growth continues to lag behind inflation, depriving price pressures of the fuel needed for self-reinforcement—removing any imperative for the Fed to hike rates.

He describes the current situation as "Teflon inflation," meaning inflationary pressures are not sticking to the economy. According to Kelly, inflation heals slowly like an injury; forcing it to heal faster may only make things worse. As long as wages don't accelerate alongside prices, a wage-price spiral is unlikely to take hold.

Kelly also criticized the Fed's recent communication strategy, calling Chair Kevin Warsh's speech at the late-August Jackson Hole central banking symposium a critical moment. Warsh must slightly soften his previously hawkish tone and acknowledge progress made in curbing inflation. Kelly added that the Fed’s suggestion of reducing future market communication is heading down the wrong path.

On whether rate hikes could restore the Fed's credibility on inflation control and thus lower long-term Treasury yields, Kelly admitted it's a difficult call. However, he warned that quantitative tightening (QT) may be a more dangerous policy tool than rate hikes, as it exerts stronger upward pressure on long-term rates. Combining rate hikes with balance sheet reduction could increase the risk of market disorder.

Kelly pointed out that financial markets are currently highly leveraged. Even a small rate hike could trigger repricing across asset classes. Higher short-term rates would push investors toward safer assets, draining momentum from market rallies. The Fed has no need to take this risk merely to speed up disinflation.