Fed policy: ‘There’s a big story’ in sticky inflation, Laffer Tengler CEO says

Laffer Tengler CEO and CIO Nancy Tengler joins Yahoo Finance Live to discuss expectations for Fed policy, inflation, and the stock market.

Video Transcript

BRIAN CHEUNG: Welcome back to Yahoo Finance Live. We're keeping an eye on the federal reserve chairman Jay Powell's testimony to the Senate Banking Committee. This is the second day of back-to-back hearings for the Fed chairman and likely the last substantial fed commentary will get before that next big meeting on March 16.

The Fed chairman telling the Senate just a few minutes ago, quote, "hindsight says we should have moved earlier," referring to, perhaps, tightening policy at the end of 2021 when inflation was rearing its head. Let's get a little bit more market commentary, though, on exactly what the fed chairman is talking about here with Nancy Tengler, Laffer Tengler CEO and CIO.

Got a little tongue-tied there, Nancy. Thanks for hopping on the program this morning. I just want to ask you broadly about what we've been hearing from the Fed. Obviously, a lot of people saying that, really, it's the Fed that remains the story for markets, not necessarily the Russia-Ukraine war, at least here domestically. How important is the Fed Chairman's commentary as we get these testimonies this week?

NANCY TENGLER: Brian, thanks so much for having me. Well, it's critically important, of course. I've been pretty critical of the Fed reluctantly, because it's very difficult to be in a leadership position. But I recently wrote a piece entitled "Inside the Beltway Might As Well Be Outer Space." And I think one of the problems that we have is that policymakers in Washington aren't regular people.

They don't live the way the rest of us do. I think almost anyone, including the uber driver I had in Las Vegas about nine months ago, could tell you that inflation was stickier and persistent than the Fed thought. And so that's really what I focus on, by the way, is the sticky CPI.

And there's a big story in there, because sticky CPI was up 4.2% percent year-over-year, so not the 7.5% headline number we saw. But the flexible portion of CPI, which is 30%, was up 17.8%. So unless we start to see some relief in that regard-- last thing I'll say is that I wrote a piece on the case for peak inflation, where we discussed worries that services inflation was going to begin to rear its ugly head. And it's a 5 to 1 ratio in CPI.

And indeed, that's what we saw in the in the numbers we got this morning on the ISM and market PMI. Prices paid we're up pretty materially.

AKIKO FUJITA: So, Nancy, that point you just made about concerns about the Fed being behind the ball here, I mean, that sort of led to the expectation of potentially a 50-basis point rate hike come later this month. And yet because of the volatility we've seen injected as a result of what's played out in Russia, it feels like the market expectation has pulled back from that. What's your base case right now?

NANCY TENGLER: Yes, Akiko, you're absolutely right-- and we were never in the camp of eight to 10 rate hikes this year. I was alive, though, not managing money, thank god, when Paul Volcker was Fed chair and raised the prime rate to over 21%. That took a lot of courage, a lot of discipline, a steely nerve.

I don't think this Fed has that. And Chair Powell is more consensus builder, he's been a good pivoter. But I never expected a 50-basis point hike. I think we get three to four this year. Even still with the Fed funds rate at 1% and inflation somewhere between 4% and 7%, we still have negative real interest rates. And so I think it's going to take this Fed a long time to get right-sized.

And then we've got a tremendous amount of debt. And the political pressure in a election year will keep them from raising too much because debt service levels are going to go way up. And I just don't think that's palatable this year.

BRIAN CHEUNG: Well, at the same time, though, Nancy, we did hear the Fed chairman tell the House Financial Services Committee yesterday that it's not like a 50-basis point hike down the line isn't off the table. Take a listen to his commentary yesterday.

JAY POWELL: We have an expectation-- those of us on the committee have an expectation that inflation will peak and begin to come down this year. And to the extent inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis point at a meeting or meetings.

BRIAN CHEUNG: So, I mean, thematically, it seems like the Fed just wants to give itself flexibility through the rest of this year. So I mean, I guess with any forecast, how usable is it when it really is quite uncertain about what the Fed is going to do this year?

NANCY TENGLER: Yeah, exactly, Brian. I mean, this is the same Fed that said-- and by the way, many of the prognosticators and strategists as well-- you know, just a year ago, we were saying no interest rate-- nine months ago, no interest rate hikes until 2024, maybe 2023. Then we went suddenly to 10 this year and then a 50-basis point in March.

You can't count on any of it. And that's why you've got to watch the yield curve, which is getting dangerously flat, indicating I don't know what exactly, because there's a lot of other noise in there right now. But over the long-term, you pay attention to the yield curve.

He is just trying to give himself wiggle room. That's prudent. But I don't put much emphasis on that statement at all.

AKIKO FUJITA: And, Nancy, finally, what has this all meant in terms of your portfolio? We've seen, you know, even before war breaking out over in Ukraine, so many who had said that energy was kind of the play, at least in the first half of the year, just given the run-up that we've seen. Is that a space that you're putting more money into? Or are you reallocating in light of what's played out?

NANCY TENGLER: Yeah, Akiko, that's the hard part. When the story is out, a lot of retail investors chase what's working. We were adding to the metals and miners and energy early last year. We were also adding to defense stocks a few months ago. And now what we're looking at is potentially stronger economy in the second quarter.

We'll see now. That may be off the table. But we actually added some to technology at the end of January. So we're looking for ideas that are specific to what we think is going to work in the next two to three years. We've been suspicious of the financial trade because we didn't think interest rates were going to go up as much as the Fed. And we shifted in that space to insurance and some of the asset managers.

So I think right now, investors should be looking for pricing power, strong free cash flow, strong balance sheet, industry dominance, and a management team that is committed to capital reallocation. We've seen a tremendous amount of dividend increases, which tells me that managements are pretty optimistic about the future. And then lastly, we're going to start to see the buybacks come in and we think the share buybacks, we think that'll put a floor under the market.

AKIKO FUJITA: Yeah, really important to cut out all the noise, especially when it comes to some of your investment theses there. Nancy, it's good to talk to you today-- Laffer Tengler CEO and CIO.