All eyes are on the Federal Reserve ahead of next week's FOMC meeting as record-breaking inflation persists and consumer sentiment hits new lows.
Thomas Hayes, managing member and chairman at Great Hill Capital, is expecting the Fed to remain cautious as they try to balance the two issues while still protecting the U.S. economy.
“I think you’re seeing the Fed trying to walk the tightrope," Hayes said on Yahoo Finance Live (video above). "They wanted to bring down demand, which they’ve certainly done, but they don’t want to destroy the economy."
A key example, he said, is how the Fed promised to do $47.5 billion of liquidity withdrawal or tightening in the month of June, but instead wound up buying roughly $3 billion net of treasuries and reduced liquidity by just $7.5 billion in mortgage-backed securities.
"They're jawboning to bring down demand, to bring down inflation," Hayes said. "But they don't want to push too hard because you see things like the jobless claims jump to 244,000... they're trying to navigate and hopefully get some type of soft landing."
Because inflation is a lagging indicator, he said, it often doesn't reflect how the Fed’s actions have affected consumer behavior and market sentiment.
“Monetary policy works on a lagged basis, so they‘ve done a meaningful amount of tightening in the first half of this year," Hayes said. "We’re seeing it in reduced demand and some jobless numbers starting to tick up."
'The market wants 75 at this point'
Fed Chairman Jerome Powell has remained adamant that the Fed is committed to restoring price stability and taming inflation.
However, at Powell’s Semiannual Monetary Policy Report to the Senate Banking Committee, he explained that a soft landing — a decrease in economic growth that curbs recession — would be “very challenging.”
Inflation jumped 9.1% in the month of June while consumer sentiment, a key indicator of how individuals feel about their finances and the economy, fell to 98.7. However, Hayes said that commodity prices should be another factor for the Fed to consider for any action moving forward.
Commodities have soared in 2022. Recent CPI data showed a 7.2% year-over-year surge in commodity prices. The Russian invasion of Ukraine and global supply chain bottlenecks are considered the main causes of these price bumps.
“The key is going to be: Does the commodities rollover from June — where you saw corn, soybeans, copper, oil, cotton, platinum, cocoa — all roll over?" Hayes said. "How quickly does that get to the cash register for the consumer, and can they jawbone until the actual prices come down, or do they have to move aggressively?"
Though some economists are predicting at 100 basis-point rate hike, Hayes is still anticipating a 0.75% increase.
“I think the market wants 75 at this point," Hayes said." I know a lot of people say we have to crush inflation, but they’re backward-looking numbers."
But, he added, "you could certainly see a situation where they raise 75 basis points, the next day GDP comes out negative for Q2, and they go on pause. And that would be the best of all worlds in the sense of creating a soft landing moving forward."
Yaseen Shah is a writer at Yahoo Finance. Follow him on Twitter @yaseennshah22