should be wary of raising interest rates too quickly, said David Kelly, chief strategist at JPMorgan Asset Management, who believes job growth and the economy will soon slow.
While the United States added 372,000 jobs in June — a level typically associated with a rapidly expanding economy — the labor market is a lagging indicator, he said on CNBC.
“It’s important not to be too aggressive right now because if you raise rates a lot right now you could have a real problem at the end of the year and heading into 2023,” Kelly told about the central bank, which meets on July 26. 27 and should raise rates by another 50 to 75 basis points to calm inflation.
Kelly thinks the economy is already showing signs of cooling. GDP contracted 1.6% in the first quarter and remained relatively flat.
And there are other signs that the economy is heading for a slowdown. The prices of basic products like gasoline have fallen, he pointed out. Meanwhile, the US dollar has hit a 20-year high and the rollback in massive government spending represents the biggest fiscal drag since the end of World War II.
“There are a lot of brakes on this economy. It’s going to slow down. Inflation is going to reverse, and they have to keep their patience,” Kelly said. “If they’re too aggressive right now, they’ll regret it later.”
The market is pricing in an overshoot from the Fed and expects it to start easing again next year, he added.
And although consumer spending on services has been robust, Kelly warned that low- and middle-income households are being squeezed by the fiscal brake and will eventually hit credit card limits.
“The labor market operates with a lag, so there’s kind of a lag in the sag in the economy, but I think it’s continuing,” he said. “And I think the Federal Reserve has some interesting navigation to do here.”