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Market strategist: ‘Catastrophic recession’ isn’t needed to rein in inflation

SoFi Head of Investment Strategy Liz Young joins Yahoo Finance Live to discuss inflation and bearish investor expectations for the stock market.

Video Transcript

RACHELLE AKUFFO: Well, SoFi Head of Investment Strategy Liz Young joins us now with more on the markets. So, Liz, as you're taking a look at the market action right now, what sort of questions do your clients have?

LIZ YOUNG: Well, I think everybody has the same questions right now and that's whether or not we are headed for a more catastrophic type recession. I still maintain that I don't think that needs to happen. There's a lot of bears out there saying that it has to happen in order to bring inflation down and that we've never had a situation where inflation has been fixed without a big recession.

Now, I think we've gotten a little bit more used to the idea of having a recession, at least sometime in 2023-- as we cool demand and now as we've heard from the Fed that they do expect to have some pain on consumers and businesses. But it's a matter of the big question being, how big does that recession have to be?

Now, we, as you've already mentioned, have gotten some pretty strong JOLTS numbers today. The labor market continues to be tight, continues to be strong. If that doesn't crack in a meaningful way, a recession, even if it does happen in 2023, does not have to be severe.

SEANA SMITH: Liz, what does this mean for the Fed, do you think, in September? Because we mentioned that JOLTS number. We've gotten a string of econ data that shows what you were just saying-- that things are actually OK. Is that going to think-- do you think we have enough conviction, at least at this point, in order to see the Fed hike by 75 basis points next month?

LIZ YOUNG: They could. And, look, they left open the possibility of 50 or 75. The market continues to be kind of split on those two possibilities. What investors also need to remember, and this is what the Fed is watching as well, is that the pace of quantitative tightening, or that balance sheet roll-off, or taking liquidity out of the market, the pace of that is going to double in September.

So then there's two tools that are working against liquidity in the market, both rate hikes and that quantitative tightening pace, and they are definitely taking that into account. Now, the one thing I would say that would be in the 75-basis point camp is that the Fed has continued to message that they would rather go too far than not do enough, because trying to clean this up later if they didn't go strong enough in the beginning is much harder and much more painful for the economy.

So if you really had to choose, they probably err on the side of doing too much. However, there is a very important CPI read that we are going to get before that September meeting. And that will come on September 13. We'll get the rate hike news on September 21. And I think that that's really going to show the Fed whether or not some of this tightening is already working.