Fed may ‘consider something more aggressive’ in September meeting, strategist says

Rob Haworth, U.S. Bank Wealth Management senior investment strategist, joins Yahoo Finance Live to discuss the latest inflation data and what it signals about the upcoming FOMC meeting next week.

Video Transcript

JARED BLIKRE: We want to keep with the inflation talk because at 75 basis points, a hike. Looks like a lot for the September 2021 meeting by the Fed, but with some Fed officials calling for front loading, a 100 bips move hasn't been completely dismissed. And let's continue the conversation now with Rob Haworth, US Bank Wealth Management senior investment strategist. And Rob, what are the chances now that we get a 1.0% full point increase in the federal funds rate when we get that meeting next week?

ROB HAWORTH: Yeah, the market looks like it's pricing in a 25 plus percentage point odds that-- 25% odds that we could get 100 basis points. And we'll have to see. There's-- the Fed is in their quiet period now, so we won't hear more from them. But I think, depending upon how the data moves and how the market moves, the Fed could certainly consider something more aggressive, given how sticky, really, inflation pressures are, even with the more benign producer price index that arrived today.

JARED BLIKRE: Well, and-- go ahead. Well, let me-- sorry, let me just ask you another question here because we are starting earnings season in a few weeks here. I'm just wondering where, given what may or may not happen at next week's Fed meeting, what are we expecting for the earnings season? We've seen a lot of estimates come down, but some people say they haven't come down far enough or faster yet.

ROB HAWORTH: Yeah, I mean, we're certainly looking out into 2023, where earnings estimates are coming down a little more quickly than 2022. I think the key question-- and this is where the producer price index gives us a good indication that profit margins and pricing power is still doing OK for companies. So as we look into, in the next few weeks, into earnings season, we're going to be watching very closely what's happening with corporate profit margins. For now, it looks like we're still going to eke out some earnings growth into year end and stay ahead of the game. But there's more questions certainly ahead.

JARED BLIKRE: And given the strength of yesterday's down movement to the downside, of course, what, without looking too far into one day's price action, just being par for the course that we've seen a number of events where the market just had to reprice a more hawkish Fed seemingly more than the last time. But you got to, at one point, wonder when does this come down. When does the market actually have this right so that we don't see these four 5% down days whenever we see a slightly elevated inflation print?

ROB HAWORTH: Well, I think this is a challenging environment, given that it's not entirely clear the exact path the Federal Reserve has followed. If we go back into history, thinking about some prior Federal Reserve administrations and leadership, they've often had a more formulaic blueprint for how they're moving forward. Chair Powell's Federal Reserve is reacting to economic data. And as we know in markets, sometimes, market watchers get that data wrong or get the projection of that data wrong.

And I think that's what we're seeing now, that the market had kind of hoped for a soft landing and a quick pivot to rate cuts. But as we're seeing now in the data, and as we're seeing the Federal Reserve say, they're being much more emphatic. Now, maybe we now have a very clear path, but I think there's that question is still open when we look at how much we've taken rate expectations up, looking for a peak now of 4 and 1/4, maybe 4 and 1/2 next year, on that Fed funds rate is what the market is starting to look at.

And so I think there's a lot of open questions that we really need to get answered or get some answers and some indication at next week's Federal Reserve meeting, particularly when we look at that summary of economic projections that's going to come out from that meeting.

JARED BLIKRE: Well, and let me ask you about the US dollar. That's another-- currency markets in general have been on fire, recently the dollar strengthening, the yen pretty much crashing. Just wondering what you see, any potential dislocations in the future that could affect risk markets, or even not dislocations, just continued movements, strengthening of the dollar, or just weakening in other currencies.

ROB HAWORTH: Well, I mean, the strength certainly reflects the difference in vigor between the Federal Reserve and other global central banks, right? We know the Bank of Japan is staying holding tight, trying to keep that-- their 10-year Japanese government bond below 25 basis points at or below 25 basis points in yield. And they're now tolerating the weakness in the yen, tolerating what should be rising inflation, although their inflation pressures are well below ours.

So we think this-- we're comfortable that this trend can kind of persist. And what we're watching is what's happening with global trade, what's happening with global demand for energy and other things, and what's happening really to corporate profits. Right? It's multinational companies that could certainly be under pressure when we think about the strength of the dollar as they try and translate those foreign earnings back into their US dollar profits. That doesn't seem to be an issue for anyone at this point in time.

JARED BLIKRE: And I'll also add that with all the tech conferences and other conferences we've had over the last week or two, surprisingly fewer negative outlooks and forward guidance by a lot of those companies. So we want to leave it there. Thank you, Rob Haworth, US Bank Wealth Management senior investment strategist.