JP Morgan Kelly claims that the US Federal Reserve overestimates the health of the US economy as they lift the ante in their fight against inflation and dismiss any talk of loosening monetary policy.
JPMorgan Asset Management’s top global strategist has given investors advice to sell crypto, buy value companies, pay attention to valuations, and stay away from cryptocurrencies.
The Federal Reserve is overestimating the strength of the U.S. economy as it feels guilty about the fact that inflation went up under their watch,” he said.
Following the speech by Federal Reserve Chairman Jerome Powell Friday at Jackson Hole, Wyoming, he was quoted as saying:
“The economy has got one foot into a recession and the other on the banana peel now. We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done,” Powell said last week.
Kelly emphasized that despite the impending increase in volatility, investors should place more emphasis on defensive plays and valuations than on short-term trends. Examples of such plays include investing in value stocks, long-term bonds, and alternatives that generate income.
“Make sure you overweight U.S. and international value, as well as stocks with relatively low price-to-earnings ratio”.
Kelly predicted that by the end of next year, the economy will “feel more normal,” citing a high risk of recession. The real question, he cautioned, is “how much damage the Fed wants to inflict on this economy,” he said. More advice the strategist:
“The Federal Reserve is overestimating the strength of the U.S. economy as it feels guilty about the fact that inflation went up under their watch.”
Kelly added on Monday that until the Federal Reserve gives up trying to control inflation, the American economy will be “wobbling on the edge of recession.” By the end of the year, he anticipates the Fed to raise the federal funds rate from its current range of 2.25%-2.5% to one between 3.75% and 4%. He explained, “The Fed may then cease raising rates and trust that the economy will just avoid recession.”
Risky assets will likely continue to struggle as Powell combats inflation with a tight monetary policy, according to several experts. In a recent email, senior market analyst at Oanda Edward Moya warned that this aggressive strategy might also lead to a slowdown in the economy.