FOMC meeting: ‘We’re definitely in the cards’ for a 50-basis point hike in May, strategist says

Capital2Market President Keith Bliss and Deborah Cunningham, Federated Hermes Chief Investment Officer of Global Liquidity Markets, join Yahoo Finance Live to talk about Fed Chair Powell's statements on interest rate hikes, monetary policy, and earnings season.

Video Transcript

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RACHELLE AKUFFO: And that is your closing bell there. Lots of cheers, but not too much to cheer about as we look at how the major indices ended the day. They started in the green, but unfortunately, couldn't hold onto those gains and very quickly, in intraday trading, fell into the red and stayed there. The Dow down over 1%, about down to 368 points. The S&P 500 also down close to 1 and 1/2%. They were down 65 points. And the tech heavy NASDAQ losing 2% on the day, down about 278 points there.

Well, Dave and Brad and I have been digesting what's been happening, but let's also bring in our market panel. Keith Bliss, Capital2Market president, and Deborah Cunningham, Federated Hermes chief investment officer of global liquidity markets. So, obviously, we heard from the Fed this afternoon. Things very quickly went downhill. What do you make of what the markets are digesting? Keith, we'll start with you.

KEITH BLISS: Yeah, well, thanks very much, and thanks for having me. Really appreciate being on the show. And you're pointing to where the really ugly reversal started to happen. Jay Powell, of course, made some comments before he goes into a quiet period before the May meeting. And what he signaled was a few things. Number one is that they tried to pin him down on his own views on a 50 basis point move in the May meeting and then the June meeting and the July meeting, which he kind of deftly sidestepped.

But he did signal with the magic words where he says, we're going to frontload the rate increases, and that is assigned to the bond market and to the equity market a little bit that he's jawboning the market. He actually wants the two-year, the 2, 10 spread to actually move up across the term structure, steepen the yield curve. And that's what we saw. I mean, when the 10-year goes up and touches 3% and goes above, that's a signal to the equity markets that that liquidity is going to flow out of there and into other places, more inflation protected types of asset classes.

So that's where we're seeing the reversal. So the more he jawbones it, he's going to get his wish. He's going to move the yield curve up and steepen it, which will give them a little bit more flexibility as they move into the series of three meetings this summer.

BRAD SMITH: And Deborah, price stability, we also know that the employment sector as well is one-- or both of those, actually, very much on the Fed's dockets to try and continue to navigate at this point in time. And quite frankly, it's still going to come down to the consumer and how much the consumer is able to take on higher prices. So where do you see the Fed's calculus here, especially as we're being more aggressive here? Where do you see that netting out if we do see more frontloading of these rate hikes?

DEBORAH CUNNINGHAM: Well, I think the frontloading of rate hikes is a certainty. It's just a question of whether it's 50 basis points in May followed by June followed by July, or if frontloading means May, then maybe hold off and wait a month or two or a meeting or two before it actually-- it becomes more on the 50 basis point continuous side. So I still don't think Chair Powell was necessarily indicating that it's 50 following 50 following 50. Having said that, I think that's the way the market anticipated it. And, you know, what they're trying to attempt to do from a Fed movement standpoint is to come to a soft landing.

You know, recession is not something that we think is in the cards in the near term. But I think that in the longer term, you know, 2023, 2024, we don't want it to be in the cards there as well. And I think that's the tightrope that the Fed is walking at this point. You know, how to keep inflation in a throttled way, lower than it potentially could be with all of the things that are working against it at this point. But at the same time, not be so aggressive that they thwart off the issues of financing and the housing market and the auto market and broader capital markets that depend on financing and what the rate of increase for interest rates would be.

DAVE BRIGGS: And Keith, is that what you expect, two consecutive meetings of 50 basis point hikes? And what would surprise you by Powell at the next meeting, May 3?

KEITH BLISS: Well, I think we're definitely in the cards for 50 basis point in the May meeting. And if you look at the Fed fund futures, it's nearly 100% what the market thinks is going to move up 50%. And then, of course, it softens the stance a little bit for the June meeting and the July meeting. But if you take a look at that and use that as your measuring stick for what they think the FOMC is going to do, we're definitely going to get 150 basis points on top of the already 25 to 50 that we have, which will move the Fed funds rate up to close to 200%-- 2%, rather, 200 basis points, 175 to 200.

And I think one of the other really telling signs today was when the San Francisco Fed president, when she signaled-- she outright said-- and she's usually very dovish. She said she would even consider 75 basis points at the next meeting if the trend continues the way it is. So listen, the market is pretty good at dictating, if not indicating, where this is going to go.

One thing that Debbie did say, though, is very important compared to if you look at the 79 to 80 time frame when Paul Volcker was really boxed in with the other finance ministers around the globe because of what was happening with the dollar, interest rates, inflation, oil, so on and so forth during that time, where he actually had to take a meat cleaver out and start raising rates rampantly, just throwing the US economy into a recession, damaging what we did here to really protect the rest of the world.

I don't think we're in that situation now. If you take a look at some of the positive things that came out of the global financial crisis was that we created, we innovated more policy tools for the Fed and the other central banks to use. And Powell even said that today. He says they will use every tool under their-- in their toolbox to get inflation under control. They anticipate-- he anticipates that he'll have it back to the 2% target level maybe not by the end of '22, but shortly thereafter.

But they'll probably have to overshoot a little bit on their target with the Fed funds and move it above 300 basis points into the 3.25 range, probably by mid '23, just to get this under control. Because inflation in the US market and the potential for throwing it into a recession because the companies will have to pass on these input price increases at some point, they're already doing it in some measure, but not totally. And if they do that, the consumer will likely back away from a lot of the goods and services, except for staples. And of course, that would be bad for the market and bad for the US economy.

RACHELLE AKUFFO: We'll certainly have to see how that plays out in terms of the earnings reports that are going to come out in future quarters, but as we look at what we've seen so far in terms of first quarter earnings, Deborah, how are you feeling about the earnings that we're seeing in terms of which ones might be a bellwether that we need to keep an eye on?

DEBORAH CUNNINGHAM: Well, I do think you're seeing adjustments for one-time items. And those are creating a little bit more of a cloudy picture. And so the excess that is coming in some of the earnings that we've seen, especially in the banking sector, is not being rewarded correctly, just simply because of the one-time items that are adjustments to the bottom line. So we think you have to take a real close picture.

The other thing that I would note, kind of going back to where the Fed is and what they're expected to do and how that impacts, especially the financial sector in banks, we're still in a very accommodative position. Comparing it to the Volcker days of '79 and '80, he was starting at a higher rate and certainly going in double digit types of increases. We're starting at a zero bound, basically.

And it's not until you get to that 2% or 3% that Keith was mentioning that you even get to the point where I would consider it to be something other than normalization, getting back to something that companies, consumers, and individuals can adjust to and digest without too much financial difficulty. Once you get above that 3%, again, depending upon where inflation goes based on that, then tightening really occurs. And I agree. I think we're going to need to go into that tightening scenario, but certainly not in the same way that Volcker did back in '79 and '80.

BRAD SMITH: We're going to leave the conversation here this afternoon. We appreciate both of your insights, especially after what was a very interesting, to say the least, day of trading. We'll see how much, of course, the Fed trajectory continues to impact the way traders are evaluating the markets right now. Keith Bliss, Capital2Market president, and Deborah Cunningham, Federated Hermes chief investment officer of global liquidity markets, thank you so much for joining us here today.