The Fed raising interest rates while fighting inflation may be 'tough sledding': Strategist

Quant Insight CEO Mahmood Noorani and Landsberg Bennett Private Wealth Management CIO Michael Landsberg join Yahoo Finance Live to examine the outlook of the Fed funds rate, the Jackson Hole Symposium, and future interest rate hikes in relation to inflation.

Video Transcript

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SEANA SMITH: For more on this, we want to bring in Mahmood Noorani, Quant Insight CEO, and Michael Landsberg, Landsberg Bennett Private Wealth Management Chief Investment Officer. Mahmood, let me start with you. The selling that we're seeing today to start the week, do you think we're going to see that selling accelerate here as we lead up to Jackson Hole and then, of course, looking ahead to the Fed meeting next month?

MAHMOOD NOORANI: That's clearly the fear. We saw some hawkish Fed minutes. The Fed has really been the only game in town for the last few months. If you look at April and May, Fed funds futures next year, they have increased the sort of expected Fed funds rates by about 20 basis points in the last few days. And clearly, there is growing concern after those minutes that the Fed is going to use Jackson Hole to communicate a harsh message about where it wants to take financial conditions in order to stamp out inflation.

DAVID BRIGGS: Michael, markets have been largely divorced from the economic news that continues to pour in. And before this market move on Monday, you said there was misplaced optimism. So is this what you expected today? And do you think it'll continue throughout the week?

MICHAEL LANDSBERG: Yeah, I do. I think a lot of the numbers that we saw in the second quarter in terms of earnings from corporations were not as good as-- other than the energy and some of the commodity sectors, it was disappointing earnings, decelerating earnings, GDP actually negative two quarters. So I think this is kind of what we saw.

It seems to be playing out like a typical bear market rally. We had the lows in June. We rallied almost 17%, 18% off those lows. And now we're going to probably retrace a large amount of that until the Fed figures out what they're going to do.

RACHELLE AKUFFO: So Mahmood, as we see the Dow, the NASDAQ, and the S&P in their worst two-day slide in two months, where are we in this bear-- in this bear market cycle?

MAHMOOD NOORANI: Well, you know, we had a lower-than-expected inflation print a couple of weeks ago. That sparked the optimism that maybe the peak is behind us. But where we are now-- and the peak may well be behind us, but that's nowhere near enough for the Fed.

And the debate now is going to be how sticky is inflation going to be? And what makes inflation sticky is the labor market and wage rises and tight labor markets that can potentially create this continued wage price pressure, the so-called wage price spiral. And so what we have now is the prospect of the Fed having to potentially move more than the market thought a few weeks ago based on this growing concern that inflation may be sticky. And if it sticks around 6%, that's a lot lower than where we were, but it's nowhere near good enough.

And so I think we may-- Jackson Hole will tell us a lot. My personal guess is that-- typically, if you look at history, it's quite hard to squeeze inflation out of the system once it gets embedded. And my personal guess would be the Fed will probably go well above 4% on its path to try and get inflation back down. And that will be a painful-- painful development for equity markets, and we may well revisit the lows.

SEANA SMITH: Michael, a similar question to you, how sticky do you expect inflation to be? And how aggressive do you think the Fed is going to be forced to be because of that?

MICHAEL LANDSBERG: Well, I think it will be sticky. I agree with Mahmood. I think it will be sticky. The other concern I have is looking back at history-- let's say we get it down to 6%. Historically when we've been able to vanquish inflation, Fed fund rates have been higher than inflation back of the late '70s and the '80s.

So I think a couple of things have to happen. We're going to have to raise rates aggressively, inflation is going to have to come down, or a combination of both. And I think it's going to be a little tough sledding for us until we get an idea. I think the Fed's been talking about being aggressive on inflation. I think that's going to have to actually be longer-- raising rates longer than people want.

DAVID BRIGGS: And Mahmood, given the relatively pessimistic setup that we've now laid out, what's the strategy moving forward?

MAHMOOD NOORANI: Well, it's really interesting when you have your market wrap-up that sectors like energy are doing quite significantly better than certainly the growth sectors. Clearly, the setup here is that this type of tightening of financial conditions is going to be painful for two sectors in particular, and that is growth stocks-- and we've seen that all year. They are reacting to financial-- they're very sensitive to financial conditions, and that's something we track very closely at QI-- and indeed, cyclicals and consumer discretionary because the Fed is going to intensify the negative GDP growth that we've seen if it continues to hike.

And so those are the sort of sectors you really have to be concerned about. Interestingly, energy is behaving like a more defensive sector. And I think it will continue to do so as we get towards the winter and there's talk of Russia cutting off supplies to Europe.

And so that has been-- the whole supply side of energy has been supporting the energy sector, so that will outperform utilities, other defensives-- well, utilities perhaps not given what rates are going to do. And you just mentioned that 10-year notes are above 3% now. But yeah, value and energy seem to be the places to hide at the moment.

RACHELLE AKUFFO: And Michael, what do you see as the most attractive opportunities right now? And what are you staying clear of?

MICHAEL LANDSBERG: Well, I think it's a good question. We like utilities, health care, staples. I think, as Mahmood mentioned, the discretionary places you want to avoid. The staples are a good spot. We've been large holders of the US dollar this year in gold. We'll continue to do that.

And you mentioned about places to avoid, a couple of our larger positions is we're short Europe. I think Europe has got more problems than we have. Their inflation hasn't subsided. In fact, actually, the UK printed an all-time high last month. I think that's going to be a problem.

Mahmood mentioned energy prices as well. They're going crazy today, obviously possible shutdowns because of Russia. And also in the US, the high-yield junk bond market, we've been short credit. We think we want to stay out of that stuff. So I think as these things play out, there are some places you can invest very, very particularly.

In the US, there's some spots, but a lot of the other places, specifically in Europe, I think you're going to want to avoid. And obviously as rates move higher, some of the lower-quality credit companies are going to be tough, tough to own junk bond in a rising rate environment. And given the fact that we're looking a recession right in the teeth, tough to own those going forward.

DAVID BRIGGS: Michael, Mahmood, thank you both. Appreciate you being here on a Monday.