US inflation progress might stall, but Fed must drop rate hikes agenda

Progress in slowing down US inflation is likely to have stalled, the consumer price index report is expected to show tomorrow – but the Federal Reserve must “resist the temptation” for further interest rate hikes.

This is the warning from Nigel Green, the founder and CEO of deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organisations, ahead of the release of US inflation data on Wednesday that will play a key role in shaping the Fed’s interest rate plans moving forward.

He says: “We expect that The Bureau of Labor Statistics on Wednesday will show higher prices for core goods – fuelled by rising prices of vehicles – which will have the effect of counteracting cooling prices more generally. 

“In addition, America’s employers added a sizeable 253,000 jobs in April, showing that the labour market is still surprisingly resilient.

“All this, we believe, will act as a spur to the Federal Reserve to raise rates again at their next meeting in June, after having hiked them last week to a range of 5 to 5.25%, its tenth increase in 14 months, and the highest since 2006.

“I would urge the US central bank to resist the temptation to do so.

“Rate hikes are a blunt instrument as they function by taking the heat down across the board, meaning parts of the US economy, which is already slowing, are likely to get broken.”

The deVere CEO continues: “US inflation has been coming down each month since it hit 9.1% in June 2022. 

“We expect headline CPI will come in at an annual rate of 5% for April – the same as in March – meaning that progress to bring down US inflation would have stalled.

“Let’s hope this isn’t a trigger for the Fed to continue on with its rate hike agenda.”

Nigel Green cited three reasons why he believes the US central bank was wrong to have raised rates last week and why it would be wrong to do so next time too.

“First, the crisis within the US financial system is still not over. There remain serious and legitimate concerns that after a string of bank failures, there could be more to come,” he noted.

“The turmoil from the banking crisis is leading to a drop in bank lending, tightening the credit conditions for households and businesses. In turn, this will inevitably lead to a slowdown in economic activity and hiring.

“The Fed’s interest rate hiking agenda has tightened financial conditions which, in part, led to the banking crisis, and now the banking crisis itself is going to put the squeeze on financial conditions even more.

“Second, the time lag for monetary policies is very long. It is said that it takes about 18 months to two years for the full effect of rate hikes to filter fully into the economy.

“Third, the bond market is suggesting a long and/or deep recession with its inverted yield curve. Yields are inversely related to bond prices.”

This is typically the sign of a coming recession – an inverted yield curve has emerged roughly a year before nearly all recessions since 1960.

He concludes: “Investors will pour over the data for clues on the Fed’s policy path on interest rates. 

“Regarding the central bank’s future plans, investors will likely be hoping for the best but fearing the worst.”

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