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Fed ‘won’t be satisfied’ with cooler inflation print, strategist says

SoFi Head of Investment Strategy Liz Young joins Yahoo Finance Live to weigh in on inflation and why she expects it to cool down, and what to possibly expect from the Federal Reserve.

Video Transcript

DAVE BRIGGS: All right, we're back now with SoFi head of investment strategy Liz Young. Back with us with more on the markets. Just was asking you about what your expectation is for the inflation print in September. And also, on those real estate numbers that we've seen come in, is that the one indication that the Fed is having some success?

LIZ YOUNG: Well, so first of all, I do expect that inflation will cool again. And I think the market will be happy with that and satisfied with that. But the Fed won't be satisfied yet. And the reason is because they want to see a trend of inflation coming down. And they want to see it coming down at a pretty quick pace.

So if they want to get to restrictive policy, you can look at that a couple of ways. You can call restrictive, some Fed funds rate above neutral. So if we're at neutral right now, they need to raise the rate above this to be restrictive. You can also look at it as the Fed funds rate being above the inflation rate, which as we all know, there's a long way to go before that happens.

But I do expect inflation to come in cooler when we get that news on September 13. We need to see three consecutive months of month-over-month declines in inflation before, I think, the Fed will feel comfortable saying, OK, maybe we can slow down. Maybe we don't have to go as far as we thought, originally.

Now, as far as the data that's showing whether or not it's working, I think that there has been more than just the housing market showing that it's working. We have seen a softening in a lot of different activity indexes. And you've seen some softening in certain parts of the labor market but not the job openings, so that really matters.

Now, if you look at PMIs, which is manufacturing activity, many of those have come down. You look at consumer sentiment-- although we got a good reading from consumer confidence today, sentiment has been coming down over previous months. So there has been a lot of softening, especially in the housing market. But you could argue that the housing market was one of the most overheated areas. And the higher things go, the further they can come back down to earth.

RACHELLE AKUFFO: And I want to ask you about investor sentiment because obviously before we heard from Fed Chair Powell, it did seem like the markets had priced in perhaps a little too much optimism about the Fed perhaps pivoting or taking a softer tone. That wasn't the case. And as we look at the AAII survey on investor sentiment, we're seeing that about 42% now are still expecting the stock market to be bearish for the next six months. And that's been creeping up steadily, that percentage. So what is your outlook in terms of investor sentiment and whether or not you think, at this point, the market's pricing things incorrectly?

LIZ YOUNG: So the rally-- I agree with you. I think the rally from June 16 to August 16 was overdone in the sense that it was predicated on the idea that we would manufacture a soft landing and that the Fed would take their foot off the pedal sooner than originally hoped. Now, the message has been very clear since then from Jerome Powell that they are still very hawkish.

So now, equities are sort of rerating back to a multiple, so a forward PE ratio, that is more rational given where inflation still is and given the idea that we have not hit peak tightening in this cycle yet. So I think that bearish sentiment that you're hearing from investors is going to continue until inflation comes down and until we get a more satisfied message from the Fed.

DAVE BRIGGS: A long way to go. SoFi head of investment strategy Liz Young, great to have you. Thank you.