• Invesco argues the Fed is not behind the curve, with policy staying restrictive or neutral.
  • The firm estimates the neutral rate at 3.5%–4.0%, close to the current 3.50%–3.75% range.
  • Inflation pressures remain near target as trimmed mean PCE sits at 2.2%, despite headline inflation above target.

A Contrarian View

As investors debate whether the Federal Reserve is lagging in its fight against inflation, Invesco offers a reasoned counterpoint: the central bank is not behind the curve. The firm contends that current rates are still restrictive or neutral, effectively balancing the economy without stalling it. This assertion comes amid a backdrop of elevated headline inflation, but Invesco points to underlying measures that suggest price pressures are closer to the Fed's 2% target than they appear.

The Neutral Rate Conundrum

Invesco's analysis hinges on its estimate of the neutral rate—the level at which policy neither stimulates nor restrains growth. The firm pegs this at 3.5%–4.0%, a range that brackets the current federal funds rate of 3.50%–3.75%. By this measure, the Fed's stance is either appropriately neutral or slightly restrictive, not dramatically behind the curve. That interpretation diverges from market expectations of imminent cuts, instead suggesting a prolonged period of steady rates.

"The gap between the current policy rate and our estimate of neutral is narrow," said an Invesco strategist, speaking on condition of anonymity. "Any easing would require clearer evidence that inflation is on a sustained path down."

Inflation: Beneath the Surface

Headline inflation has remained stubbornly above the Fed's target, but Invesco emphasizes the trimmed mean PCE—a measure that strips out volatile components—which sits at 2.2%. That's remarkably close to target, indicating that underlying price pressures are far less alarming than the top-line number suggests. Energy price fluctuations and short-term supply constraints, the firm argues, have skewed the headline figure, masking a more benign trend.

"The market often fixates on the loudest number," the strategist added. "But the Fed, with its focus on core and trimmed measures, sees a different picture—one that doesn't scream urgency for rate cuts."

Market Implications

The debate over the neutral rate and the timing of potential moves has real consequences for investors. If Invesco's perspective holds, fixed-income markets may have mispriced the likelihood of aggressive easing in 2025. Equities, meanwhile, could find support if the Fed avoids abrupt shifts, but face headwinds if rates stay higher for longer. Investors are now closely monitoring wage data and consumer spending, which could influence the Fed's next policy decision.

As the policy path remains uncertain, Invesco's stance provides a counterweight to the consensus, urging patience rather than panic. Whether the Fed adopts this view or pivots, the coming months will test the resilience of both the economy and the central bank's credibility.