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Everything we heard from the Fed today was 'in line with expectations,' strategist says

Rebecca Felton, RiverFront Investment Group Senior Market Strategist, joins Yahoo Finance to discuss expectations after the Fed’s decision to raise rates, the state of the banking crisis, and inflation.

Video Transcript

DAVE BRIGGS: Well, Fed Chair Jerome Powell saying there was consideration for pausing rate hikes, but ultimately, the Fed decided against it. Here's Chair Powell on why there was not a pause.

JEROME POWELL: There was supported by a very strong consensus, and I'll be happy to explain why. And really, it is that the intermeeting data on inflation and the labor market came in stronger than expected, and really, before the recent events, we were clearly on track to continue with ongoing rate hikes. In fact, as of a couple of weeks ago, it looked like we'd need to raise rates over the course of the year more than we'd expected at the time of the SCP in December, at the time of the December meeting.

We are committed to restoring price stability and all of the evidence says that the public has confidence that we will do so, that we'll bring inflation down to 2% over time. It is important that we sustain that confidence with our actions, as well as our words.

DAVE BRIGGS: All right, for more reaction to the Fed decision, we're joined by Rebecca Felton, RiverFront Investment Group senior market strategist. Nice to see you. So your reaction to the hike and to the tweak to the language, which emphasized additional policy firming ahead.

REBECCA FELTON: Well, thank you so much for having me. And not to sugarcoat it, but it was really nice to not have any surprises out of this release today, nor Chairman Powell's comments. We have been of the belief that they would have to continue to raise rates. Those inflation numbers are still way above where they want them to be, with that most recent core CPI coming in at 5 and 1/2% and the PCE number is also high.

So it is going to take a while for them to get that price stability to a number where they want. And I believe when you think about what has happened in the recent weeks with these banks very specifically, each of their problems have been very specific to them. And it doesn't suggest necessarily any type of contagion. So there will be more scrutiny, but we believe that everything we heard today was in line with expectations.

SEANA SMITH: Rebecca, that new language in the statement, though, really does convey some of the uncertainty out there just in terms of the stress that we have seen within the banking sector. How are you looking at this from a market perspective, and really, the ability or the risk there that it could affect the economy down the line?

REBECCA FELTON: Well, the implications down the road, aside from greater levels of scrutiny, particularly as we think about some of the regional banks, could be tighter lending conditions, which has impacts for growth, both for small businesses, as well as consumers. And that would, obviously, have some impact on growth expectations going forward, which calls into question whether or not earnings estimates still have to come down further. We believe that estimates probably have already been revised enough.

Obviously, we're headed into Q1 earnings season very quickly. It's hard to believe March is already over. So what we'll need to be paying attention to, obviously, are CapEx plans, hiring plans, and just some of those cost pressures that companies have been seeing whether or not those are easing at all.

DAVE BRIGGS: Leading up to this, a lot of discussion about whether or not Powell would focus on inflation and price stability or stabilizing this banking crisis. In your perspective, does the 25 point hike have any impact on the banking crisis as we now know it?

REBECCA FELTON: I believe it's too soon to tell that. Again, when we think about some of the policies that they've put in place with the bank term funding program, obviously, that eases some of the tensions that we have seen with some of the smaller banks. But this was in line with expectations, actually, maybe a little lower to expectations than where we were even a month ago.

So I think net, net, we have been in an environment where we expected these rates to continue to go up. As we move further into the year, companies have adjusted to that. Estimates have been adjusted for that. So really, again, nothing really new today.

SEANA SMITH: Have you shifted your strategy at all, given the recent events over the last couple of weeks or anything that we heard from Powell today?

REBECCA FELTON: Well, we had already earlier this week, last week, actually, we did reduce our exposure to US banks, specifically our exposures to the regionals. We're probably neutral to slightly underweight US banks, but we have an overall neutral weighting in financials because we have some European financials as well across our strategy. So we did take some steps on those regional banks.

DAVE BRIGGS: And how about the larger banks?

REBECCA FELTON: We're still neutral there. Again, lowered our exposure somewhat. We had been overweight, so we've pulled that back in just slightly. We are neutral equities in general because we believe that there are still so many uncertainties around growth. But if you think about where the market is priced right now at 17 times forward earnings, there's a lot of expectation for a resumption of positive growth in Q3 and Q4. And then looking ahead to 2024, since we do have that lookahead bias, there would be a clearer resumption of growth across many sectors, not just a few.

DAVE BRIGGS: And as for the probability of recession, Mr. Powell said it's hard to see that this banking crisis helped the likelihood, but a pathway to a soft landing still exists. Has this last few weeks changed your probability of a recession?

REBECCA FELTON: Well, we had been expecting that we could have a global recession in the back half of '23, maybe early '24. But then you look at that with-- or compare that to where GDP now is for Q1-- 3.2%, I believe, quarter to quarter annualized, and then, again, growth in the first half of this year. So we're not looking at any data right now that is pointing to a recession when you think about GDP, when you think about the employment situation, the consumer resiliency, the fact that homebuilders are feeling better. There is a lot of positive things going on underneath the surface in this US economy.

SEANA SMITH: Rebecca, what do you make of the current employment situation, the fact that the labor market has remained so resilient? We heard Powell talk about that again, saying that the labor market is still too tight. What do you say?

REBECCA FELTON: Well, clearly, we know that they expect it to change. I think that they took their unemployment forecast up just modestly in this newest release, but still, yet, it would be a little higher than where we are now. And that would be expected when you think about the fact that if things do soften a little bit-- we've already seen wages start to come down some. And we've seen prices start to come down some.

So maybe the situation for employers won't be as bad as has been expected. But we also know that a lot of jobs aren't getting filled that have been posted and posted for quite some time. So there are a lot of mixed signals as we look out over the next several months on the employment front. But the good news for consumers is more of them are employed, and that does bode well for the economy.

DAVE BRIGGS: Yeah, we're still around two workers for every available job in this country. And at 3.6, does it have to break to get inflation down to 2%? And if so, what's going to do that?

REBECCA FELTON: I don't know that I have a good enough crystal ball to predict that per se. I wish I did, but I think, again, a lot is going to ride on how tight these bank lending standards get for small businesses and consumers specifically. When you look at the chunk of GDP that consumption is, I think that that's going to be a really important component as we go through the next few months and into the end of the year, as it relates to whether or not we have a recession. So there's a lot of uncertainty, which, again, goes back to our neutral positioning in our strategies.

SEANA SMITH: Rebecca, where do you see inflation right now in the current path that we are on by the end of the year?

REBECCA FELTON: Well, you figure, again, CPI is at 5 and 1/2%. It is hard to see it going significantly maybe below-- again, I hate to predict, but when you think of the trajectory we've been on already, it would be hard to get it below 4, I believe, if we were to stay on the current path.

DAVE BRIGGS: OK, Rebecca Felton, appreciate that. Thanks so much.