JPMorgan's David Kelly Talks Inflation, CPI Report

Summary

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Podcast Summary: JPMorgan's David Kelly Talks Inflation, CPI Report

Podcast: Bloomberg Talks
Host: Bloomberg
Guest: David Kelly, Chief Global Strategist, JP Morgan Asset Management
Date: October 24, 2025

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Episode Overview

This episode dives into the latest U.S. inflation data and the implications for Federal Reserve policy. Bloomberg's interviewer sits down with David Kelly of JP Morgan Asset Management to analyze the CPI report, market expectations for future interest rate cuts, and the broader health of the economy and financial markets. Kelly challenges mainstream assumptions around inflation risk, Federal Reserve mandates, and the perils of over-stimulating already "bubbly" financial markets.

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Key Discussion Points & Insights

1. Interpreting the Latest CPI Report

(Starting at 00:29)

• April CPI data came in below expectations.
• Markets responded by increasing bets on two more Fed rate cuts, including one potentially next week.

David Kelly:

• Describes the economy—and the CPI report—as "K-shaped," with different sectors diverging in performance.
• Rents: Rental costs, a key inflation component, are coming down due to demographic shifts; "rental inflation is just going away."
• Used Cars: Noted decline in used vehicle prices.
• Core Goods (excluding food/energy): Despite tariffs, retailers are not able to pass tariff-induced cost increases onto consumers, keeping inflation tame.
• Quote:

  "It is clear that mainstream retailers don't believe they can pass on the tariff increases right now and that's what's making this inflation rate a little bit tamer than people feared."
  (David Kelly, 01:26)

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2. Are Inflation Fears Overblown?

(01:39)

• Market consensus says inflation worries were overhyped; possible path for inflation to fall below 3% by end of next year.

David Kelly:

• Argues long-term inflation risk is limited, but warns of a brief "spurt" early next year:
  • Predicts a significant spike in tax refunds—average refund per household to rise from $3,200 to over $4,000.
  • Retailers might use this consumer "refund bonanza" as an opportunity to pass on tariff costs, generating a temporary uptick in inflation.
  • Afterward, expects inflation pressures to subside again.
• Raises a critical question:

  "Given how bubbly financial markets are, do you really need the Federal Reserve adding more liquidity to the party right now or should they just, you know, hang on in there and say this is enough liquidity?"
  (David Kelly, 02:33)

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3. The “Bubbly” Market & Asset Valuations

(02:45)

• Interviewer challenges Kelly—why call markets bubbly when earnings are strong and forecasts are positive?

David Kelly:

• Cites historically high stock market valuations:
  • U.S. market capitalization currently at 365% of GDP—much higher than 212% during the tech bubble (2000) or 87% before the 1987 crash.
  • Notes high profit margins and earnings relative to GDP, especially concentrated among mega-cap stocks.
  • Warns of leverage "upon leverage," saying the market is vulnerable to correction:

  "There is a, you know, it's leverage upon leverage, high PE ratios on a very high level of earnings relative to GDP. ... One of the dangers here is that everybody gets out over their skis and then you have a significant market correction or, or a bear market."
  (David Kelly, 03:33)

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4. Risks of Fed Policy: Cutting “Into Strength”

(03:46)

• Is it a policy error for the Fed to cut rates when markets are already strong?

David Kelly:

• Asserts that Fed rate cuts now do not stimulate growth or control inflation, but do fuel asset bubbles:

  "The Federal Reserve's short term interest rates are not impacting growth, they're not impacting inflation, but they are impacting financial markets. And the big problem that we've had in this century ... hasn't been CPI inflation getting out of hand. It's asset bubbles."
  (David Kelly, 04:01)

• Suggests Fed should avoid over-stimulating, especially when the economy isn’t at risk of recession:

  "The Federal Reserve should not be in the business of blowing up bubbles. ... If the economy is, you know, is not threatened by recession because we are, we are seeing money go into financial markets, go into financial assets and just not come out. And it's sort of, it's kind of like a stuck valve."
  (David Kelly, 04:20)

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5. Should the Fed’s Mandate Be Updated?

(04:43)

• The interviewer probes whether the Fed should reconsider how it interprets its "dual mandate" (maximum employment and stable prices).

David Kelly:

• Advocates for expanding the dual mandate to explicitly include maintaining stable financial conditions and preventing asset bubbles:
  • Draws a parallel to the European Central Bank, which eventually recognized the need to intervene in systemic crises.

  "Congress needs to recognize, they need to recognize that monetary policy has significant impacts on financial conditions and therefore maintaining stable financial conditions should be part of the goal. ... The mandate needs to be expanded a little to recognize the impact of Fed policy on financial and other asset price bubbles to try to prevent bubbles or busts."
  (David Kelly, 05:06)

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6. Closing & Takeaways

(05:48)

• The interviewer thanks David Kelly, appreciating the "thoughtful" analysis.
• Kelly urges caution as the Fed faces a unique economic environment, emphasizing the need for a policy stance that balances economic growth with financial stability.

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Notable Quotes & Memorable Moments

• "Rental inflation is just going away." (David Kelly, 00:56)
• "Retailers don't believe they can pass on the tariff increases right now and that's what's making this inflation rate a little bit tamer than people feared." (David Kelly, 01:26)
• "My question is, given how bubbly financial markets are, do you really need the Federal Reserve adding more liquidity to the party right now?" (David Kelly, 02:33)
• "There is a ... leverage upon leverage, high PE ratios on a very high level of earnings relative to GDP." (David Kelly, 03:28)
• "The Federal Reserve should not be in the business of blowing up bubbles." (David Kelly, 04:10)
• "Congress needs to recognize ... monetary policy has significant impacts on financial conditions and therefore maintaining stable financial conditions should be part of the goal." (David Kelly, 05:06)

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Timestamps for Key Segments

• 00:29: Episode begins, Bloomberg introduces focus on CPI and brings in David Kelly
• 00:50: Kelly on K-shaped inflation, rental and used car prices, tariffs
• 01:39: Inflation fears, potential for rate cuts, risk of "tariff inflation spurt"
• 02:45: High market valuations and risk of correction
• 03:46: Fed policy and the dangers of fueling asset bubbles
• 04:43: Discussion of expanding the Fed’s mandate to include financial stability
• 05:48: Closing remarks and thanks

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Tone and Style

Kelly is analytical, direct, and leans heavily on data, but is also openly cautious about optimism in the markets. The discussion balances Bloomberg’s crisp, news-oriented interview style with Kelly's deeper strategic insights.

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Transcript

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[Interviewer]

News this morning the focus is on inflation CPI coming in below expectations. Traders adding to bets for two more rate cuts this year, including one next Wednesday. David Kelly of JP Morgan Asset Management joins us now for more. David, let's start with the inflation data is three the new two and is it going to stop this Federal Reserve from cutting interest rates?

[David Kelly]

I think the Fed's going to keep on cutting rates. It's generally a better than expected report. But I think what it really shows is we have a K shaped economy and it's sort of a a K shaped CPI report. The thing that really jumped out at me is first of all, rental costs coming down. There's, you know, we've got a big change in demographics here and rents are rental inflation is just going away. You also saw used vehicle prices fall. I thought that was pretty, pretty interesting. And then the big thing here is core goods prices outside of food and energy. That's the stuff that should be hit by tariffs. But that's only up 2, 10 of a percent, up 1 1/2% year over year. It is clear that main mainstream retailers don't believe they can pass on the tariff increases right now and that's what's making this inflation rate a little bit tamer than people feared.

[Interviewer Follow-up]

David doesn't just justify what the markets already sussed out, which is that inflation fears were overblown earlier this year. The Fed can keep cutting potentially below 3% by the end of next year and that it's not going to cause a huge inflation problem.

[David Kelly]

Well, I never thought we had a long term inflation problem, but I think it is still early days on the tariff effects. What's going to happen is, you know, right now retailers feel like they can't pass on the price increases, but early next year you're going to have this refund bonanza. The average income tax refund per household we believe is going to be over $4,000. Last year was $3,200 and that is the exact time when retailers are going to feel like they can pass on these tariff increases. So I do think we've got a little bit of a spurt in tariff inflation still to come. But then if nothing else happens, there isn't a lot of momentum in this economy and it'll slow down again and it'll cool down again. So I don't think we've got a long term inflation problem. My question is, given how bubbly financial markets are, do you really need the Federal Reserve adding more liquidity to the party right now or should they just, you know, hang on in there and say this is enough liquidity?

[Interviewer Follow-up]

What are you saying or what are you seeing that really is bubbly given the fact that earnings have exceeded expectations, the forecasts have exceeded expectations and we're likely to see more of the same next week with the tech earnings.

[David Kelly]

Well, valuations are extremely high for the overall. Now obviously it's a lot of it's concentrated in the mega cap stocks but also profits as a share of GDP are extraordinarily, extraordinarily high. So overall the total value of all US market cap is about 365% of GDP right now. It was about 212% before the tech bubble burst back in 2000. It was 87% before the 87 stock market crash. So there is a, you know, it's leverage upon leverage, high PE ratios on a very high level of earnings relative to gdp. Now I still think this is a very good economy for equities, but I wouldn't say that you could call the market depressed at this stage. I think that one of the dangers here is that everybody gets out over their skis and then you have a significant market correction or, or a bear market.

[Interviewer Follow-up]

So are you talking about potentially if the Fed is cutting into strength, they'll.

[David Kelly]

Be making an error this month? Yeah, because it's a different economy. And we keep on talking about well, the Fed's going to tighten to lower inflation. Forget about it. The Federal Reserve's short term interest rates are not impacting growth, they're not impacting inflation, but they are impact financial markets. And the big problem that we've had in this century of the 2000 hasn't been CPI inflation getting, getting out of hand. It's asset bubbles, you know, whether it's housing bubbles or tech bubbles. And the Federal Reserve should not be in the business of blowing up bubbles. So I think they should just take it easy. I don't mind if they cut rates a little bit here, but I certainly would have a problem if they cut rates below what they think neutral is. If the economy is, you know, is not threatened by recession because we are, we are seeing money go into financial markets, go into financial assets and just not come out. And it's sort of, it's kind of like a stuck valve. And the more more money goes in, the more this, this market just seems to accelerate upon itself.

[Interviewer]

And David, we asked Governor Wall of this question when he was on the program last week. We asked whether he was getting lulled into kind of interest rates and potentially juicing financial markets. David, do you think there's a problem with their interpretation of the dual mandate or just the dual mandate?

[David Kelly]

I think the dual mandate itself, I think that, I think that if you, if you they need, Congress needs to recognize, they need to recognize that monetary policy has significant impacts on financial conditions and therefore maintaining stable financial conditions should be part of the goal. It's kind of like with the ecb who for years decided they weren't supposed to intervene if one particular country got into significant economic distress and destabilize the euro system. And then finally Mario Draghi said, look, if Greece is a problem, we've got to do something about Greece. Well, this is a similar situation where the mandate needs to be expanded a little to recognize the impact of Fed policy on financial and other asset price bubbles to try to prevent bubbles or busts because of course, what, that's what, you know, bubble creates a bust and you want to have financial market stability, not just economic stability. And I think the Federal Reserve can have an impact on that.

[Interviewer]

David, this was thoughtful. We appreciate your time. David Kelly there of JP Morgan Asset.

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