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Fed most worried about wage price spiral alongside inflation

Federal Reserve regulators opted to pause interest rates while continuing to keep a close on forthcoming economic data, such as unemployment and wages. Northwestern Mutual Wealth Management Company CIO Brent Schutte comments on Fed Chair Jerome Powell's statement, how the Fed will be approaching labor market data, and recession risk amid inflation.

"I actually agree with Chair Powell — the base case is not a soft landing even though the numbers they put out today look like a soft landing," Schutte says on the Fed's economic balancing act. "I don't think people spend enough time in the labor market, which is too tight according to Chair Powell. To me, that means wages are too strong, and wages running at 4.5% as he said in the last press conference are not consistent with 2% inflation."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

AKIKO FUJITA: Brent, good to talk to you today. Does your base case change in any way based on what we heard from the Fed today?

BRENT SCHUTTE: No. I actually agree with Chair Powell. The base case is not a soft landing, even though the numbers they put out today look like a soft landing. Look, I don't think people spend enough time on the labor market, which is too tight, according to Chair Powell. To me, that means wages are too strong. And wages running at 4.5%, as you said in the last press conference, are not consistent with 2% inflation.

And to me, the Fed wants wages to come lower. And the only way historically that has happened is through recession. And so I guess in a long roundabout way, I still expect there's going to be a recession in the not too distant future, which I think will put a wet blanket on top of market gains. And that's where I think people should shift their focus more towards fixed income.

JOSH LIPTON: And Brent, can you just quantify that for us? When you say recession economic downturn, when would you expect that to hit, and how deep and long you would you expect that downturn to be, Brent?

BRENT SCHUTTE: I think it's timing uncertain. It's certainly taken longer than what I think a lot of people thought because there is excess savings. The consumer was in good shape. Corporations termed out their debt. And so I think the economy is less interest rate sensitive. But the longer this liquidity tourniquet stays on, the greater the chance there is a recession. And I don't think the Fed is going to take that off anytime soon, which, to me, means there will be a recession.

I think it's likely in the next six to nine months. That's where I think one is likely. But certainly, a bit uncertain on the length of that. I think from an overall perspective, I do think it'll be mild just because of the condition of the consumer and the corporations, which I think are still in good shape. And so with that, I kind of believe you'll actually see a bit of a recovery on the other side that's pretty sharp to.

AKIKO FUJITA: Brent, the comments coming today from the Fed Chair certainly point to the uncertainty they're operating right now in terms of where the economy is headed. But he was asked specifically about that soft landing case. And he said, look, some of that may actually be in factors that are not in our control. The UAW strike, you could argue, is one such risk that the Fed can't necessarily control. How are you looking at that playing out? I know we're approaching a week still not a ways in. But how significant a risk is that?

BRENT SCHUTTE: Yeah. I mean, to me, it's more indicative of a tight labor market. And so you've seen wages run pretty hot, at least above where the Fed wants them to run. And the UAW strike is indicative that employees have some kind of bargaining power over employers, which typically happens at the end of every economic cycle. And that's what causes wages to rise.

And I think people need to remember the period of time in this country in which inflation ran hot, 1966 to 1982, was called a wage price spiral, where wages kept going higher and pulling inflation back up. And to me, that's what the Fed is worried about. That typically happens at the end of every economic cycle. And that's where you're at today. And that's why I still see the Fed continuing to fight inflation until wages push lower. And unfortunately, the only way that has occurred in the past is through a recession. And I don't think this time will be any different.