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Fed is ‘laser-focused’ on labor market as industries face various employment challenges: Strategist

Baird Investment Strategy Analyst Ross Mayfield joins Yahoo Finance Live to discuss the minutes from Fed meeting and how the Fed is navigating the current labor market.

Video Transcript

SEANA SMITH: And we've already seen a number of companies begin to announce more rounds of layoffs. Meta is far from the only one within that sector. You have Twilio, Wayfair, Crypto.com, Rivian, Vimeo, Groupon, DocuSign, just some of the names here that have already announced their second round of cuts this year. So we talk about the fact that we are starting to see layoffs, corporate layoffs creep back in.

For the most part, while there certainly are a couple of one-off stories here and there, many of the layoffs have been centralized-- have really been within the tech sector, within the information technology sector here. What we need to watch, though, is whether or not that starts to spread. At least for now, it seems like it's staying within that industry.

DAVE BRIGGS: It does. I mean, McKinsey did announce, I think, 2,000, one of the biggest cuts they've ever seen. You had a few others. KPMG, I think the first of the big four accounting firms, are going to lay off about 2%. But for the most part, this is a tech story. I can't help but wonder ZipRecruiter had a very tough report today. Their stock has fallen about 24%. So I can't help but wonder-- we don't want anyone to lose their jobs-- but if ZipRecruiter could add some names to that list.

For the most part, though, when you look at the other side of the economy, it was just yesterday we talked about Home Depot investing a billion dollars in wage increases, Walmart raising their minimum wage from $12 to $14 and their average pay to 1,750. So it's still really an economy of two completely different stories at this point, as the labor market remains hot and extraordinarily tight and shows really no sign of letting up outside of tech.

SEANA SMITH: Which, of course, then could potentially be good for those who are unfortunately laid off here, hopefully able to find a new job a pretty quickly. But it's also important to point out a lot of these companies that are laying off employees are ones that scaled very, very quickly during the pandemic. So the number of layoffs still do pale in comparison to the number of hires that they have made over the last three years.

DAVE BRIGGS: They're still well above pre-pandemic employment levels. Let's talk more about this with Ross Mayfield, Baird investment strategy analyst. Good to see you, Ross. What do you make of these continued layoffs, the report at the Washington Post? And what does it tell you about what is coming?

ROSS MAYFIELD: Yeah, I think you all said it right. Whether it's a West Coast recession or a rich-cession, it's clearly focused in kind of the information and kind of white collar sectors. The story in basically every other part of the economy is, as you mentioned, companies either investing and hoarding labor, keeping labor, or outright sectors and industries that can't hire enough people. Manufacturing construction-- there's a shortage that is causing them to really have problems in kind of chokepoints in the supply chain. So, you know, it is a tale of two markets.

And I guess the story for the Fed and for the US economy is that the information sector is such a small percentage of overall employment. Even though it's a big percentage of the stock market, so it gets this outsized weight in our head, the bigger story is still labor market tightness and what that means for the Fed as we go forward in the year.

SEANA SMITH: Well, Ross, what do you think it means for the Fed going forward for the remainder of the year? We just got the Fed minutes released earlier this afternoon. The takeaway here, they're signaling at least higher rates potentially for longer. What was your read on that and the implications there for equities?

ROSS MAYFIELD: Look, I mean, at this point, the Fed has been fairly consistent. It's the market that has come entirely around to their view, which is higher for longer, terminal rate above 5%, all the way through to the end of 2023, and then kind of take a look around. So we might get a change in tune when they have their March meeting, their updated summer of economic projections, but at this point, it's basically been the market repricing to meet the Fed where they already stood.

And so what does it mean? Well, the Fed is laser focused on employment. They're talking about core services ex housing. That's just code for wages. And right now, they see a labor market that's still deeply imbalanced and still short, you know, enough workers to cause upward pressure on wages and therefore price inflation. So, you know, nothing meaningful that would change how they're feeling about things.

DAVE BRIGGS: Should we take those Fed minutes with a grain of salt, given how much has changed in the data since that Fed meeting?

ROSS MAYFIELD: Yeah, absolutely. I mean, it's been a February for the books so far. But I mean, I think if anything, again, all that happened in February was the market came around to what the Fed had already been saying. So if there's risk to one side or the other, I think unfortunately or not, it's risk to the upside from the Fed's earlier projections at this point. The labor market has not really yet cracked.

And the disinflationary process has started, but CPI and PPI were hotter than hoped for. So I think if anything, you're starting to see some Fedspeak, about 50 basis points or maybe an extra 25 basis point hike in the summer. So if anything, there's risk to the upside when they release their projections in March after all of this February data.

DAVE BRIGGS: Ross, do you think we're headed for a 50? At the next meeting?

ROSS MAYFIELD: It's tough to say. Probably not at the next meeting. I think the market is still pricing-- last time I saw, it was about an 80/20 for a 25. I think there-- I think the Fed doesn't want to react too much to one report. I mean, if there's a long-term story about this economic data, it's that one month of data can be noisy. There can be seasonal adjustments. There can be big revisions after the fact.

And if the Fed hikes too much on this one report that, say, then gets revised down, you risk stepping into overtightening and all the things that come along with that. So I think they'll stick to 25 here, but I think they'll be a lot more open to the idea of 50 or another 25 down the road, maybe not getting to that terminal Fed funds rate until sometime over the summer. And then of course, the big part of their projections, which is higher for longer, holding that steady through the end of the year, perhaps into 2024.

DAVE BRIGGS: Yeah, certainly looks like that's what they're going to have to do, getting anywhere near 2%. Ross Mayfield, thanks so much. Appreciate that.

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