****

Amid mounting political pressure from various corners, including repeated frustration expressed by President Donald Trump and calls for rate cuts from the Federal Housing Finance Agency, the Federal Reserve seems poised to maintain its focus on inflation control rather than succumb to partisan demands. Speaking at the 53rd annual FPA NorCal conference, J.P. Morgan Chief Global Strategist David Kelly highlighted why Federal Reserve Chair Jerome Powell and his colleagues are unlikely to reduce interest rates in the near future.

Kelly reinforced that the Federal Reserve operates under a dual mandate from Congress to promote maximum employment and maintain price stability, generally considered to be a 2% inflation rate. As of March 2025, the U.S. unemployment rate stood at 4.2%, while the core personal consumption expenditures (PCE) index - a key measure of inflation - was recorded at 2.5% in April. These figures suggest that the economy is grappling more with inflation than with unemployment.

According to Kelly, Powell has been "crystal clear" in his recent press conferences: the Fed evaluates how far each economic metric is from its target and how quickly they are expected to return to desired ranges. Currently, the outlook indicates that inflation could increase to 3.5% by the end of the year, further away from the Fed's 2% goal, while unemployment is predicted to tick up only slightly to 4.5%.

Kelly argues that the Fed is "missing more on inflation than on unemployment", which implies that significant rate cuts in the coming months are unlikely. Although there might be a symbolic rate cut towards the end of the year - potentially as a "holiday present to the administration" - the Fed will probably wait for more substantial evidence of inflation aligning with its 2% target before making further adjustments.

Kelly identifies three key reasons why interest rates are likely to stay elevated. Firstly, inflation remains too high; the Fed is committed to maintaining price stability even if it means holding rates steady in the face of political pressure. Secondly, global debt levels, notably from the U.S., Europe, and Japan, are putting upward pressure on long-term interest rates, lessening the feasibility of aggressive short-term rate cuts. Lastly, maintaining the Fed's credibility is crucial; any perceived loss of independence could lead to higher long-term borrowing costs.

Investors should brace for an extended period of higher interest rates, with Kelly predicting fixed income returns to average around 5% over the next five years. Despite the Trump administration's attempts to stimulate the economy through various policies, dubbed as "fiscal fudge" by Kelly, the Fed's commitment to its dual mandate remains unwavering.

In conclusion, while rate cuts could eventually materialize, they won't occur without solid economic data backing such a move. The Federal Reserve's priority remains clear: managing inflation and employment based on economic fundamentals.