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Fed: 'The 30+ year bull market in interest rates is over,’ strategist says

F.L.Putnam Chief Market Strategist Ellen Hazen joins Yahoo Finance Live to discuss personal consumption expenditures (PCE), inflation, market growth, and the outlook for the Fed.

Video Transcript

- I mean, this is rare going to guide some of the discussion within the FOMC next meeting. So where do you believe the CPI reading should or could come in at, in order to really give us a sense of what action the Fed may take next, or if it will kind of deter or alter the course at all?

ELLEN HAZEN: Thanks for having me. The Fed is looking at a lot of different measures, not just CPI, but of course, PCE, Personal Consumption Expenditures, their preferred index. And we think that inflation has probably peaked and will be declining toward the rest of this year. Part of that is just the base effects.

As you know, the denominator begins to change as we move throughout the year. So the year-over-year growth is somewhat less. But inflation is going to be slow to come down, and the reason for that is that companies have a wide variety of different factors leading to inflation. There are higher labor costs. There are higher fuel prices, higher transport and logistics prices, higher commodities prices, and some of these are going to come off but they won't come off all at the same time.

So the Fed is on track to increase rates by 50 basis points, probably, at each of the next two meetings, as they have suggested and talked about. And as we look forward, we think that we need to see inflation down well below 5% for the Fed to begin to ease off the brakes. And we don't know how quickly that can happen, but certainly, not over the summer. And so we're looking at inflation coming down but remaining well above the 2% that we saw for the last decade and a half, after the great financial crisis. Therefore, the Fed is going to stay hawkish through the rest of this year.

- And it's interesting, Ellen, it's Julie here. It's interesting, because it feels like, to your point, that the market has started to get more concerned about growth than about inflation. And it is sort of looking, perhaps, for any excuse, any reason, anything that the Fed could seize on as a reason to not be as hawkish, but the Fed, it doesn't sound like you think, is quite there. So it feels like that disconnect perhaps could cause some more turmoil in the market.

ELLEN HAZEN: The Fed has had a put for the last decade and a half, as we know, the famous Fed put, where any time the economy began to slow down, and particularly when financial conditions began to tighten, as measured by the markets. Whether it's the stock market declining, whether it's spreads in fixed income land widening, the Fed would come to the rescue, and that is not going to be the case this time. The Fed has made it very clear, they're going to raise rates, and they're going to shrink the balance sheet through quantitative tightening by letting bonds roll off and, in fact, selling some bonds as well.

And so that idea that the Fed will always come to the rescue we think is really not going to happen this time. The 30-plus-year bull market in interest rates is over, and from here on in, rates are going to be higher. They may not be higher in a straight line. There may be some puts and takes, but we're not going to see continually lower rates from the Fed or from the market.

- Well, Ellen, against that backdrop what's your favorite investment theme, and why?

ELLEN HAZEN: So we're looking at companies that have high free cash flow generation, and those are companies that not only have cash on the balance sheet today but that are generating cash going forward. So if you look at that, that's food and staples retailing, companies like CVS which generates over 100% of free cash flow every year and is trading at 12 times earnings, with a 13% free cash flow yield. We're looking at companies like Broadcom which generates 200% free cash flow to net income and which is able to use that cash flow to do acquisitions and pay down the debt taken on by those acquisitions over time. So in an era of slowing economic growth, you really need to look for companies that have strong free cash flow generation.