The Fed is ignoring a key inflation metric — it could cost them

As the Federal Reserve kicks off its two-day policy meeting, investors are widely expecting the central bank to hold rates steady. But could policymakers be ignoring a critical piece of the puzzle? 

Jay Hatfield, CEO of Infrastructure Capital Management, joined TheStreet to explain why the Fed may be ignoring one key inflation metric—and what that could mean for the timing of rate cuts.

Related: Stock Market Today: Trade war damage drags stocks lower with Fed on deck

Full Video Transcript Below:

JAY HATFIELD: With regard to Fed policy, You know, not should necessarily listen to everything the president says. I mean, do your own work. True of anybody. But in this particular case, he's correct about the Fed. They follow an index that's about two years lagged for CPI is two years lag. We have CPI/R. It's on our website that's running at 1.3% year over year. So but the Fed is going to be slow to figure this out. They understand how to deal with tariffs. So I do think for them to cut we do either need to see some inflation reports with tariffs that are modest, which we think will be true and/or maybe not a crash in the labor market, but some weakening in the labor market.

With regard to the Fed's first rate cut, we're sticking with three cuts this year. But we think they'll come in the second half of the year. And the reason for that is what I just mentioned that we're forecasting. Actually CPI stays under control over the next couple of months as these tariffs come in because of the fact that energy is more important than tariffs. Tariffs are only as proposed, only 1/2% of GDP. And energy is more than that in terms of the reduction in price. So but the Fed is not good at forecasting inflation, sort of given up after their debacle during 22. So we think they're going to actually need to see those reports and maybe the labor market weaken. Hopefully not actually. And then they'll cut three times out of the four meetings every half year as four meetings. So we think they'll cut three, maybe two because they are behind the curve.

Well, with regard to a soft landing, the right way to think about that in terms of Fed avoiding the recession is it's better to be lucky than smart. So the Fed has bungled monetary policy really over the last five years. Had two lower target and forecast inflation way over, cranked the money supply and created a great inflation. So they're not good at their job, but they're lucky in the sense that we have a shortage of housing. So normally housing crashes. Now it's just kind of bubbling along. And plus the market's better at running the Fed than the Fed is. So they've cut long term rates down to about 4 and 1/4, even with no Fed action from 480. And that's given more leeway to the housing sector, which is normally what causes crash in housing, almost always causes recessions. So again, lucky it's better lucky than smart, very resilient housing market because of a shortage of homes in the U.S.