Lazard Asset Management’s Post

Transcript

Jay Powell just wrapped up the FMC press conference and I wanted to share my takeaways. Chair Powell said progress in reducing inflation has been delayed, but I disagree. I think over the next two to three months inflation will bottom before re accelerating as higher tariffs translate to higher prices for companies and consumers in the United States. The average tariff rate for the United States has more than tripled from 2.7% / 9% in the last two months, and every one percentage point increase in the tariff translates to about 10 basis points of core CPI. That means we have over 60 basis points of inflation in the pipeline. That should become visible in inflation metrics over the next three to six months. Markets are saying the Fed will cut rates by about 65 basis points by the end of the year, but again, I disagree. I think the Fed will be precluded from cutting. Rates because of rising inflation, even as they watch GDP growth decelerate and unemployment increase. If I'm right, that means fair value on the US 10 year might be closer to 5% and we could see ongoing volatility with risk to the downside for US equities as the Fed struggles with this challenge of inflation and weakening growth.