The Fed is 'building in a lot of uncertainty' while fighting inflation: Strategist

Commonwealth Financial Network CIO Brad McMillan joins Yahoo Finance Live to weigh in on the latest Fed rate hike and its effects on fighting inflation.

Video Transcript

- OK, let's talk a little bit more about this. We have Commonwealth Financial Network's chief investment officer Brad McMillan joining us. And Brad, let's first start off with the reaction that we're seeing in the stock market, because we've been fluctuating between gains and losses here for the past hour or so. Dow, NASDAQ, and S&P all moving to the upside. What's your takeaway from what we just heard from the Powell-- from Fed Chair Jay Powell and what we're seeing play out in the markets?

BRAD MCMILLAN: Well, I think the initial reaction, Seana, is fear. Oh my god, they really went to 75 basis points. And then when you look at this written statement, you have a statement that says, yes, we're going to keep going.

But then, of course, it bounced back. Well, hey, that's good, we're going to get inflation under control. But then Powell comes out and actually says the economy is out of balance. And a big part of what he's talking about is giving examples of those out-of-balance numbers. And that's why we have inflation. And we're going to keep going until we get into balance.

And I think what-- I think the markets are saying, OK, we do need to get back into balance. And we've got somebody up there that can be trusted to do that. So I think that's why we're edging back into the green, because yeah, we know where we're going, and we know we're going to get there.

- And Brad, your reaction to the Fed Chair saying a soft landing will be very challenging, even saying we're not sure even how severe a potential recession might be. Is that the language you expected from Powell?

BRAD MCMILLAN: I think I expected Powell to go out there and say, we are going to get inflation under control. And I don't think he wants to say, yes, we're going to have a recession, because A, that's not certain, B, that would be a terrible soundbite. But when you look at the projected growth for the rest of the year at 0.2%, that's as close as you can get to saying we're going to have a recession without actually saying we're going to have a recession. And then when you look at the next year's expected growth, we're not going to bounce back quickly.

So they're building in a lot of uncertainty. They don't want to say it. And I don't blame them for saying it. But they've been very clear, this is about inflation. This is not about employment. This is not about growth. This is about getting inflation under control. And we're going to do what it takes.

- And you talked about initial panic. We did see the VIX pop above 30 as soon as that announcement was made, but it obviously has tempered down since then. But when asked about this incentive about frontloading, though, about core PCE inflation readings, he said they're not where we expected or wanted them to be on a 3, 6, and 12-month basis. What do you think this means, then, going forward? What are the expectations? And do you think the markets are really ready to price in the reality of what the Fed is trying to convey?

BRAD MCMILLAN: Well, on the first one, I think Powell gave us a hint to his thinking. He's not just looking at one data point, nor should he be. He's looking at the 3, 6, and 12-month trend. He wants to see them rolling down. And I think that's exactly right. And his point is we're not there yet, so we're not even going to think about slowing down, or even stopping, much less, until we get to that point. So we have an idea of what that metric is.

So when you look at that, I think the market is expecting-- and in fact, this is what the dot plot is saying-- we're probably going to be done maybe towards the beginning or middle of next year. I think Powell is saying that, yeah, that's our best guess, but the risk is to the downside. It might go on longer.

- Brad, do you think we've hit peak hawkishness here from the Fed?

BRAD MCMILLAN: I would have said so, Seana, before the press conference. But when you look at the way he's talking about it, I mean, he continues to channel Volcker, basically. And he keeps saying what the data tells us is what we're going to do. I think right now, he believes this is peak hawkishness, but he's very explicitly left the door open to keep going. So I think probably yes, but the chances of a no are a lot bigger than I would have said 20 minutes ago.

- Yeah, clearly willing to take some pain, as he has said, reiterated over and over again. 4.4% unemployment. The estimate next year, are you buying that? How much worse might it have to get to get inflation-- to get price stability for Powell?

BRAD MCMILLAN: Well, there's two things going on here. First of all, yeah, we need to loosen the unemployment. We need to raise the unemployment rate. But that doesn't necessarily mean job destruction. That can mean more jobs being created. That can mean the labor force shrinking. And to some extent, that doesn't matter. It's a distinction without a difference. But we can see that happen just by seeing job growth slow substantially. We typically see jobs growing even during a recession, but the labor force grows more.

So it could be bad, but it's not necessarily as bad as those numbers would seem to suggest. And I think ideally, given the strength of the economy and the job market, that's probably where it's going to come from. Not mass job losses, but simply slower growth.

- And staying on this trajectory, Powell said that no one knows whether this process will lead to a recession, or if so, how significant the recession would be, and said that's going to depend on how quickly wage and price inflation pressures come down. When you look at things like wages, do we get any indication that they're moving in the direction that the Fed wants right now?

BRAD MCMILLAN: We've seen real wage growth, in particular, go negative. And that's obviously mostly due to inflation. But we're not seeing too much in the way of the mitigation of wages. And more to the point, when you combine wage growth with job growth, when you look at the total growth in purchasing power, we're not seeing any mitigation at all.

But that's where I say if we start to-- do see wage growth pull back, and with that, we also see drop-- a drop in job growth, that can be more of an impact to the economy as a whole. But no, we're not there yet. And frankly, if-- if-- that hasn't even peaked yet. We've still got a ways to go.