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There may be a 'long, painful recession' if the 'Fed loses its cool': Economist

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Vested Chief Economist Milton Ezrati joins Yahoo Finance Live to discuss the latest move by the Federal Reserve and whether or not it will be enough to combat inflation.

Video Transcript

RACHELLE AKUFFO: All right, well, now let's bring in Milton Ezrati, Vested chief economist, to weigh in on Powell's comments and the Fed decision. So Milton, that 75 basis point hike, how is it in terms of, is it enough? Is it too little? And what did you pass through in terms of the comments that you heard from Powell?

MILTON EZRATI: Well, it was certainly easier to listen to Powell now than it was last year. He's talking straight. He refuses to say that there won't be a recession. He's hopeful about the soft landing. He's being very-- playing it very close to the chest about how much rates are going to have to go up.

I think he's soft pedaling. I think if the-- unless we get very lucky with the inflation, and that would be very lucky, he's going to have to raise rates a good deal more. And I think the market will be disappointed if they think that this is the end or close to the end.

Keep in mind that even with these rate increases, you're still paying less on your loan than the lender is losing on inflation. So, effectively, you're making real return for the use of someone else's money. The Fed has to change that to say that financial conditions are really tight. And it needs to make them tight to beat the inflation.

So my own assessment is that he's going to have a very hard time, in fact, a nearly impossible time, giving us the soft landing. He has to soft pedal that now, not because he's hiding anything, but because he's going to look at the data. If we get lucky on inflation, we may avoid this, but that would be very good luck.

SEANA SMITH: Milton, it sounds like you're expecting we would likely be headed towards a recession if we're not already in one. How deep of a recession do you think we'd likely see?

MILTON EZRATI: Well, that's an interesting question. I think if the Fed does its job and raises rates enough and tightens financial conditions enough to avoid a recession-- excuse me, to stop the inflation, or at least start us on the road to stopping the inflation, then we would have a relatively short recession and come back from it relatively quickly.

If the Fed loses its nerve and doesn't do enough, and the inflation itself causes the recession, which is entirely possible-- inflation causes a great many economic dislocations-- then it could be a long, painful recession. So in this sense, I'm applauding Chairman Powell's repeated statement that the most important thing is that the Fed do what is necessary to stop the inflation. I don't think they've done enough yet, but they have to go cautiously. I think they're going to have to do a lot more.

DAVE BRIGGS: Despite what he calls--

MILTON EZRATI: And it will lead-- leads to short recession. Sorry.

DAVE BRIGGS: No problem. Despite what he says is robust job growth, more than 400,000 jobs created per month on average, he does say, Powell, that he's seeing some signs of housing, business investment, consumer spending shrinking. Do you see signs that the Fed is succeeding? And between now and September, do you think that 9.1% print will begin to come down?

MILTON EZRATI: That would be good luck because inflation moves at a lag. And it's responding to years of money creation, as well as the supply constraints and the more immediate effects. So, yes, I think we could see lower numbers, but we're not going to see acceptable numbers for quite some time. And I don't think there's any way to avoid that. This is built into the system.

And I'm not going to join the transitory crowd, or neither am I ready to forecast that we've done enough. So I think we're going-- we may see the numbers come down a little bit. We may see it fall considerably. Maybe it's 7 and 1/2% or 7% inflation. That is still unconscionability high. So the Fed's going to have to continue to keep the pressure on to do its job.

I do see the mix that Chairman Powell talked about. And I would be loath to say that we're in a recession now. But this is a definition game. I think the important thing to realize is the economy is weak and weakening. And if the Fed does its job or if the inflation gets worse, then it's going to get weaker sooner. So by September, by the end of the year, I think we will be talking about recession without the reservations that Chairman Powell expressed earlier in the day.

RACHELLE AKUFFO: And was there anything that you hoped that Chair Powell would go into more detail on in his comments?

MILTON EZRATI: I would love for him to tell us what the Fed really thinks because they have their deliberations. And clearly, there's a number of forecasts. No one can see the future, but I know he can't do that. And I was actually delighted to see his reluctance to do forward guidance. It's as much as saying that we don't know exactly where we are, and we're going to have to go with the data, which was honesty that we haven't seen from Washington in a while.

SEANA SMITH: Milton, the reaction that we're seeing in the bond markets today, the reaction that we're seeing in the equity markets, I know you're focused on the economy, but just your reaction to this because I think a lot of people thought that, largely, what we heard from Jay Powell today had already been priced in.

MILTON EZRATI: Well, I think we had priced-- the equity market has been discounting a recession of some sort for quite some time. So bouncing a little bit in this environment, particularly with the Fed soft pedaling things, particularly with the fact that the Fed didn't raise rates any faster than the market long expected. It's not surprising that the market would show a little optimism. But I think if it's hoping that this is it, it's going to be disappointed.

DAVE BRIGGS: Yeah, don't hold your breath, indeed. Thank you very much. Milton Ezrati, appreciate your insights here.