What You Need to Know
- The chief global strategist says price data suggest inflation increases above the Fed's 2% target.
- He expects the Fed will announce taper plans within two months and start slowing asset purchases in December.
- The stock market, which has rallied since November, is due for a correction, J.P. Morgan's Lebovitz says.
The U.S. economy likely recovered all the strength it lost during the coronavirus pandemic by the end of the second quarter, which presages more gains for the rest of this year and into 2022, says David Kelly, chief global strategist at J.P. Morgan Asset Management.
“It does appear that we are getting past the worst of the pandemic and will be able to get back to normal by the fall in human and economic activity,” Kelly said in a recent midyear outlook webinar.
He cited increasing Transportation Security Administration traffic data along with rising credit card activity, mortgage applications and dining out. Although about 9 million workers remain unemployed, there are an equal number of job openings, according to the JOLTS (Job Openings and Labor Turnover Survey), Kelly said.
But along with the good news are signs of rising inflation due to rising wages and rising prices, pushing inflation well above the Federal Reserve’s 2% target, Kelly said.
Core personal consumption expenditures (PCE), the Fed’s favorite inflation gauge — which excludes food and energy — rose 3.4% between April and May, while the consumer price index in May gained 5% over the past 12 months.
“I’m not looking for explosive inflation, but the latest data suggest the increase may be a little more than transitory … because wage growth has picked up and inflation expectations,” Kelly said. “Our basic bet is that we have moved to something of a new paradigm.”
The Fed’s official position has been that the price increases are transitory.
Due to rising inflation and rising asset prices, the Fed should not try to target the 3.5% unemployment rate set in September 2019 — a 50-year low — in its quest for full employment, but instead begin soon to prepare for tapering its bond purchases, Kelly said.