U.S. Markets close in 4 hrs 21 mins
  • S&P 500

    4,244.89
    +37.62 (+0.89%)
     
  • Dow 30

    33,534.49
    +197.82 (+0.59%)
     
  • Nasdaq

    12,942.06
    +162.15 (+1.27%)
     
  • Russell 2000

    2,001.82
    +26.56 (+1.34%)
     
  • Crude Oil

    92.24
    -2.10 (-2.23%)
     
  • Gold

    1,810.50
    +3.30 (+0.18%)
     
  • Silver

    20.48
    +0.13 (+0.64%)
     
  • EUR/USD

    1.0254
    -0.0071 (-0.6870%)
     
  • 10-Yr Bond

    2.8620
    -0.0260 (-0.90%)
     
  • Vix

    19.37
    -0.83 (-4.11%)
     
  • GBP/USD

    1.2124
    -0.0079 (-0.6462%)
     
  • USD/JPY

    133.5950
    +0.5960 (+0.4481%)
     
  • BTC-USD

    23,939.88
    -584.53 (-2.38%)
     
  • CMC Crypto 200

    569.30
    -1.99 (-0.35%)
     
  • FTSE 100

    7,504.26
    +38.35 (+0.51%)
     
  • Nikkei 225

    28,546.98
    +727.65 (+2.62%)
     
  • 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.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

The market is convinced the Fed is 'fighting inflation with all of its talons out': 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.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

RJ Gallo, Federated Hermes Senior Portfolio Manager, and Seema Shah, Principal Global Investors Chief Strategist, join Yahoo Finance Live to discuss market reactions to the Fed's 75 basis-point rate hike, inflation, and economic indicators amid recession worries.

Video Transcript

SEANA SMITH: We want to bring in Federated Hermes senior portfolio manager RJ Gallo and Principal Global Investors chief global strategist Seema Shah. It's great to have you both. Seema, first to you. Let's start with the equity reaction that we're seeing. Yes, adding to some of the earlier gains. Dow now up nearly 100 points, I believe, if we can pull that up right now. You can see the Dow up 71 points. S&P up just about 1.2%. The NASDAQ giving up, actually, some of its earlier gains. What's your reaction to what we heard from the Fed, the 75 basis point hike?

SEEMA SHAH: Well, look, I think the 75 basis point was fully expected by the market, although there had been, of course, that speculation after the CPI number of a slightly bigger 100 basis point hike. They have become very, very clear in what to expect for this month.

Now, of course, for the press conference, it's all going to be about how is the Federal Reserve thinking about the slight slowdown in growth coming and how quickly do they think they're going to get to kind of the next restrictive territory. I expect there will be questions about recession and potential rate cuts. [INAUDIBLE] interest to almost give their full answer to those questions.

RACHELLE AKUFFO: And RJ, your reaction to it being a 75 basis point hike and what you're hoping to hear in the press conference from Jay Powell.

RJ GALLO: 75 was fully anticipated. The brief flirting with 100 basis points was very brief, so I don't think there's anything surprising at all in the 75. I would echo the sentiment that Chairman Powell faces an interesting task. The bond market is pricing in easing basically by summer of next year. It's pretty unusual in the history of Fed hiking cycles for the market to price it at ease so quickly after the expected peak in the Fed funds rate from the tightening cycle, which should be, like, in January or February of next year.

The market has gotten very convinced that a Fed that was slow to fight inflation is now fighting it with all of its talons out. And the inflation will come down. Market [INAUDIBLE] might be a little too optimistic on that front in pricing it at ease that quickly. And it'll be interesting to see how Powell answers those questions. I bet he'll talk about data dependency and that inflation is still much too high, sort of subtly pushing back against the argument that an ease is coming by next summer.

DAVE BRIGGS: Seema, of course, prior to last month, the last 75 point hike was 1994. We forget the context on just how much Fed tightening is doing. And you have some numbers on that, just how much they're doing in such a short period of time historically speaking.

SEEMA SHAH: Yeah, it's very interesting. In the space of four months since they started hiking back in March, in the space of four months, they have hiked just as much as they did through the entire three-year period of 2015 to 2018. So this is turning out to be one of the steepest hiking cycles that we have seen in recent Fed history.

And I think it goes very far to show the kind of fight that they are on. They have to, as we've just heard, they have to put everything they have into bringing down this inflation rate. And I agree. I think this is going to be very painful. It's going to be extremely slow. And the market might be a little bit too optimistic if they're expecting rate cuts as soon as next summer.

SEANA SMITH: Well, Seema, exactly how painful do you see it potentially getting?

SEEMA SHAH: So we are expecting a recession to hit the US economy in the first half of next year, probably the first quarter of next year. We are actually expecting the Federal Reserve to continue hiking in the beginning of 2023. So we're expecting a peak rate of 4.25%. That is above market expectations. And unfortunately, with that kind of tightening on the way, it's going to be very difficult for the US economy to avoid a recession.

RACHELLE AKUFFO: And so, RJ, in terms of the factors that are outside of the Fed's control, what are you watching most closely?

RJ GALLO: Well, the supply shock that is apparent in many sectors of the economy, the supply chain problems, whether it be offloading at ports, whether it be the fossil fuel complex, which was certainly aggravated by the terrible events that are going on in Ukraine, the Fed can't control those things. They can't unkink the supply chain. They can't suddenly come up with more natural gas to flow to Europe or more oil on world markets.

But I think what's important to realize is the Fed knows it can't affect those things. They're watching them, too. What they can affect with interest rate policy, with monetary policy, is the level of aggregate demand and where that aggregate demand meets that attenuated supply. So I think they're acting in the correct manner. The policy error that was transitory is in the past.

And the Fed is now focused very much to prevent the inflation problem, which is acute. Highest inflation over 40 years, working to prevent that from becoming endemic in the economy where inflation expectations become much too high, and the Fed has to absolutely tank the economy to address them.

We do think a recession is a real risk. It's not quite our base case. We think we might skirt by the recession. It's an extraordinary time. The unemployment rate is also at about the lowest in 50 years. So we have a lot of economic strength coming into this that can suggest that the economy could decelerate just enough to allow disinflation. I still think, though, ease is coming by June of next year. But I don't know that our base case is a recession either.

DAVE BRIGGS: Seema, we eagerly await the words from Jay Powell. And certainly, he'll be asked about the coming GDP number, which many expect to be negative, therefore the technical definition of a recession. How do you expect him to walk that tightrope of whether we're in or whether we're not in a recession?

SEEMA SHAH: I mean, I think it's-- I think he'll just point to the labor market. We know that it's an extremely strong labor market. And when you're seeing payrolls averaging at about 375,000 per quarter, that is not the official definition of recession. You need to see weakness on consumer spending, retail sales, and certainly, the labor market as well. And we're not quite reaching that. So although this would be, as you said, two potential two quarters of negative growth, to them, that won't quite qualify as a recession.

DAVE BRIGGS: Seema Shah, RJ Gallo, great to have you both on this all-important Fed day. Thank you both.