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Market strategist: ‘Time will tell’ if the Fed can engineer a soft landing

Veronica Willis, Wells Fargo Investment Institute Investment Strategy Analyst, joins Yahoo Finance Live to discuss the outlook for markets, Fed policy, and inflation.

Video Transcript

BRIAN SOZZI: Taking a broader look at markets now, more hawkish Fed could finally put the brakes on inflation, but higher than expected price pressures may mean investors need to settle in for the long haul. For more on Fed policy, inflation, and the global outlook, let's bring in Veronica Willis, Wells Fargo Investment Institute investment strategy analyst. Veronica, good to see you here this morning. I'm sure you heard those comments from Lael Brainard just breaking. And Brian Cheung, our very own Brian Cheung, noting that the doves are now gone inside the Federal Reserve. What's your take on that?

VERONICA WILLIS: I think it's really what we've expected. The outlook for inflation leaves little room for the Fed to do much else. The economy is still showing some strength. We noticed in the services PMIs that just came out this morning that we're still seeing expansion in the services sector. And with inflation at these current levels, expectations for inflation to remain elevated through this year and through next year, the Fed has to raise interest rates here. There's little else that the Fed can do.

JULIE HYMAN: Veronica, it's Julie here. Where do you think the sort of the suspense lies at this point, right? Is it the question of whether the Fed is going to be able to engineer a soft landing? Is it relevant exactly how many increases they do and by how much? I mean, what's the question that you most want answered this year?

VERONICA WILLIS: I think the idea around the Fed being able to engineer the soft landing is kind of the biggest question. The bond market seems to be a little bit concerned that the Fed might overshoot, but the stock market seems to be comfortable with what the Fed has indicated that they're going to do. The Fed's been very transparent, and I think the stock market has priced that in. And so time will tell.

We're not thinking that the Fed is going to push the economy into recession. I think most are not expecting that. But we are expecting kind of a slowdown in economic growth from what we had expected previously, but still around average economic growth here in the US.

BRIAN SOZZI: Veronica, do you think inflation will start to slow this year?

VERONICA WILLIS: It's possible that inflation might start to slow towards the end of this year, early next year. But we're still looking at 6.8% inflation on average for this year, so still pretty elevated throughout this year.

JULIE HYMAN: And Veronica, you all have taken this period of time and taken cues from the market to try and reduce risk. What does that look like for you guys?

VERONICA WILLIS: So we've recently recommended for our investors to take some equity risk out of their portfolio and kind of restructure that into fixed income. The S&P 500 had entered a correction, and then we've kind of seen it come out of that correction a little bit, and so using this opportunity of this bounce to rebalance some of those gains into fixed income. As we're expecting further volatility, there's a lot of uncertainty for markets right now. We're later in the economic cycle than we were previously, so now might be a good time to reduce a little bit of that equity exposure, but not to completely exit the equity markets.

BRIAN SOZZI: And Veronica, talk to us about some of your thinking behind downgrading your view on financials because I think so many investors have been conditioned to think interest rates higher, higher margin for banks, stock prices for the banks go higher.

VERONICA WILLIS: So we were previously favorable on financials. And we've moved to a more neutral view there in financials. So I think what's important is that we're still advising that investors have exposure to financials, but sort of at a more benchmark type of weighting, as opposed to overweighting that compared to the benchmark. So we still want our investors to have some exposure to financials. We expect for them to do well, as interest rates are rising. But we just think that sectors like energy, sectors like tech over the next six to 18 months will outperform. And so that's where we have the more favorable view.

JULIE HYMAN: And then if you put it all together for us and looking at the financials as potentially a group that might benefit as rates go up, and it was affected by inflation, obviously, you have a lot of inputs for inflation. It's not just the Fed clearly, right?

And I guess that goes to the idea of whether this is a supply driven inflation or demand driven inflation or both. But considering what continues to happen in Russia-Ukraine, the effect that has had on prices, considering what's happening around the globe in terms of shipping, what's the likelihood that the Fed will not be as effective against inflation? And then what, if that happens?

VERONICA WILLIS: Yeah, I think that's a big toss-up because we really don't know what's going to happen there. We know that energy prices are moving higher. We know that agricultural prices are moving higher. And it's something that's out of the Fed's control. And so the hope is that the Fed can help tamper some of that inflation. And even if we're not able to get back down to the Fed's target at 2% inflation because of the war in Ukraine, then we'll at least be at a lower level of inflation than what we're seeing now.

BRIAN SOZZI: Veronica Willis, Wells Fargo Investment Institute investment strategy analyst, good to see you this morning. Have a good week.