U.S. markets closed
  • S&P 500

    3,825.33
    +39.95 (+1.06%)
     
  • Dow 30

    31,097.26
    +321.86 (+1.05%)
     
  • Nasdaq

    11,127.84
    +99.14 (+0.90%)
     
  • Russell 2000

    1,727.76
    +19.77 (+1.16%)
     
  • Crude Oil

    111.04
    +2.61 (+2.41%)
     
  • Gold

    1,812.00
    +10.50 (+0.58%)
     
  • Silver

    20.05
    +0.38 (+1.95%)
     
  • EUR/USD

    1.0437
    +0.0013 (+0.13%)
     
  • 10-Yr Bond

    2.8890
    0.0000 (0.00%)
     
  • GBP/USD

    1.2118
    +0.0014 (+0.12%)
     
  • USD/JPY

    136.3110
    +0.6510 (+0.48%)
     
  • BTC-USD

    20,273.43
    +1,068.43 (+5.56%)
     
  • CMC Crypto 200

    440.20
    +20.06 (+4.77%)
     
  • FTSE 100

    7,232.65
    +64.00 (+0.89%)
     
  • Nikkei 225

    26,454.24
    +300.43 (+1.15%)
     
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

The Fed is 'not necessarily being rosy' with its 75 point hike: Strategist

In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Andrew Levin, Former Federal Reserve Board Special Adviser and Dartmouth College Economics Professor, and Elyse Ausenbaugh, J.P. Morgan Global Market Strategist, join Yahoo Finance Live to analyze the influence the Fed's 75-point interest rate hike will have on future rate hikes, the outlook on lowering inflation, and how markets are digesting recent economic activity.

Video Transcript

SEANA SMITH: We want to bring in Andrew Levin. He is a former Federal Reserve Board special advisor and economics professor at Dartmouth. Also, Elyse Ausenbaugh, JPMorgan global market strategist. Andrew, first, to you, because Powell signaling that the Fed could stay very aggressive. 75 basis point hike today, 50 to 75 on the table for July. Does that type of policy, that aggressive a policy, make sense to you?

ANDREW LEVIN: I think that the Fed is making the same mistake now that they've made persistently over the last year, more than a year. Let me be concrete. The Fed just released a fresh set of projections for inflation, what it expects inflation to be this year. OK, now, we're already halfway through the year. They are projecting that headline PCE inflation is going to be about 5% for the year as a whole.

Now think about this for a moment. The inflation rate for the first half of the year is at around 7%, OK, for core PCE. In order for them to get that forecast of 5%, that means that for the second half of the year, inflation would have to be at 3%, which seems very unrealistic.

Now, with core inflation, their projection for the year as a whole is 4.3%. But core inflation, PCE inflation's been running at 5% for the first half of the year. So that means they would have to drop very rapidly to 3% over the next six months. I think the Fed is being still too rosy, too optimistic. And probably, the actual rate hikes they are going to have to do over the next six months to a year is going to be much more significant than what seems like it could work if the current forecast actually materialized. OK, but that seems, to me, quite unlikely.

DAVE BRIGGS: OK, Elyse, we want to back up just a bit and get your reaction to, first, the hike, 75 points, the first time since 1994. And now your reaction to Andrew as well on the tail end there that the Fed is being too rosy, too optimistic.

ELYSE AUSENBAUGH: Well, I think--

ANDREW LEVIN: I mean, they should be. Oh. Sorry, please.

ELYSE AUSENBAUGH: I was going to say that if you would have asked me a week ago, we would have thought that 75 basis points would be a big surprise. But of course, coming off of the Friday inflation print and the way that the market moved really quickly to price in that probability, not a surprise.

I personally think and JPMorgan thinks that the Fed's not necessarily being too rosy. A lot of economic data from even today kind of got lost in the Fed shuffle. But we are already starting to see signs that economic activity is slowing down to a degree that should continue to cool inflation. I think Powell did a really good job of managing the market's expectations and letting the market know that there's got to be some optionality at play here.

To think that the Fed might tilt dovish in the months ahead, I think would perhaps be-- that that would signal that someone's being misled about their expectations. But putting 75 basis points on the table for July and then, again, seeing what happens in September, I think remains kind of the right mindset.

RACHELLE AKUFFO: And Andrew, we did see that the markets jumped, as Chair Powell laid out. Really, the thinking behind the rate hike, as well as-- so we heard these terms, nimbly moving, nimbly and being-- moving expeditiously. We heard those words peppered throughout his press conference. What will he have to do, then, between now and the end of the year, or in the future sessions, to really try and meet these goals that he's looking at for inflation?

ANDREW LEVIN: Well, I think it's helpful that the Fed emphasized in the same day they're strongly committed to bringing inflation back to the 2% goal. But in my view, they have a long way to go, a long way to go. Inflation doesn't move normally that quickly going downward. And they've emphasized that China, they've emphasized the commodity prices of the labor market. Nominal wage growth now is running at 6% or 7%. That's not consistent with a 2% inflation rate. And the housing prices and the rents are still going up. So I think there's a risk, actually, that inflation is going to be higher at the end of this year than it is right now.

SEANA SMITH: Well Elyse, one thing that Powell also did say, just in terms of when the Fed wants to meet its objective of bringing inflation rate down to 2%, he wants to do that while the labor market remains strong. Do you think that's possible?

ELYSE AUSENBAUGH: We do think it's possible. One of the things that he pointed out in the context of that comment was that there continues to be this surplus of demand for labor. And the supply has not yet caught up. So I think it is realistic to think or assume that we could see that slight uptick in unemployment over the next couple of years, but not necessarily a dramatic spike that would have been reflective of what we saw in 2020 or in 2008, coming out of the global financial crisis.

DAVE BRIGGS: And Andrew, to your notion about rosy and optimistic, it was a surprise to hear Powell say-- and I'm going to quote-- there's no sign of a broader slowdown that I can see in the economy. Instead, what would you like to have heard from Powell there?

ANDREW LEVIN: Well, I think the realistic scenario that I can see-- and I agree with Elyse. I think this morning's retail sales report was important. What I think we're heading for now is what economists used to call stagflation. That means very weak, kind of close to zero economic growth, combined with continued elevated levels of inflation. That's the likely scenario here. And it's not a very rosy one. Consumers are not going to be any happier six months or a year from now than they are today because their real incomes won't be rising.

RACHELLE AKUFFO: And so then, Elyse, in terms of your clients, whether or not they were expecting this 75 basis point hike, where do people position themselves now, knowing that we're still in this rate rising environment, that we could see more aggressive action coming out in future sessions?

ELYSE AUSENBAUGH: I think people need to revisit their goals and assess whether they're going to be able to stay on track towards meeting those goals, while taking less risk. When you can get 5% from investment grade corporate bonds or municipal bonds on a tax equivalent basis, that looks really compelling, especially when you consider the confluence of risks and the amount of uncertainty that's likely to continue to weigh on the equity market.

It doesn't mean that investors have to blow out of stocks. But we are encouraging folks to focus on upgrading the quality of those positions, leaning into sectors like health care, which, historically, have proven to be very durable, regardless of whether we were in an economic boom, bust, or somewhere in between, and also considering using some of this volatility to our advantage by putting on structured notes that allow investors to participate in the stock market with some downside protection.

SEANA SMITH: Elyse, what do you think's been priced into the market at this point? A 75 basis point hike in July, has that been priced in yet?

ELYSE AUSENBAUGH: Yes, I think so, because what the Fed just came out with in terms of those forward-looking projections in the dot plot, we pretty much saw that adjustment in markets over the course of Monday and a little bit yesterday. So at this point, you know, I think these hawkish expectations are pretty well embedded. And of course, as Powell said, we're going to have to kind of take a data dependent approach to this.

We, in particular, do think that interest rates are likely. It's hard to say that they're peaking right now. We are probably going to continue to see some rate volatility. But over the longer term, a one or two-year time horizon, we do think that interest rates are going to be biased to the downside. And so we're comfortable adding duration. But you can also look at opportunities on the shorter end of the curve if you are really concerned about that interest rate risk. And certainly, at the very least, use that as a means of liquidity management.

RACHELLE AKUFFO: And Andrew, as we look at-- obviously, we're focusing on what the Fed can do in terms of lowering interest rates-- I'm sorry, raising interest rates and also trying to tighten with their quantitative easing. But what about things that are outside of the Fed's control? What are some of the indicators that you're keeping an eye on there?

ANDREW LEVIN: Oh, that's a great question. I think that, unfortunately, it looks more and more likely that the situation in Ukraine is going to drag on for a long time to come. It's a horrific situation. But that's going to have big global consequences, as Chair Powell emphasized today. The situation in China doesn't look like it's getting better. And so what we were hoping for was supply chain disruptions would be starting to ease this year. If anything, they might get worse because that situation in China is very, very difficult.

RACHELLE AKUFFO: Certainly lots to watch for. A big thank you to our panel. Andrew Levin there, former Federal Reserve Board special advisor and Dartmouth College economics professor. And Elyse Ausenbaugh, JP Morgan global market strategist. Thank you both.