The Federal Reserve's higher for longer interest rates are forcing many investors to ask what's in store for the economy. Many financial experts debate whether or not a recession is imminent. GLOBALT Investments Senior Portfolio Manager Thomas Martin joins Yahoo Finance to break down what changes in interest rates and treasury yields mean for investors and the economy at large.
“I put the odds of a recession [happening in the US] at about 50/50," Martin asserts, adding: "There's a lot more opportunities for something to break, which might also impact Fed policy."
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BRAD SMITH: --letting their balance sheet run off, but Thomas, you also believe that there's going to be at least one more potential raise in 2023. If we do see that, what does that set up for 2024?
- Well, the dot plot shows that there will be not really any interest rate cuts in 2024. And the market has moved more towards that reasoning. Really, it all matters what happens to the economy. And we're poised here on that point in time where the lagged effects, the long and variable lagged effects are really starting to come due.
I mean, it could have been six months ago, and it could still be six months from now, given the strength of the consumer and the labor market. But it's still very likely to be coming. It's just hard to be patient for that. And so we're going to get a lot more information into 2024. And there's a lot more opportunities for something to break, which might also impact Fed policy.
SEANA SMITH: Thomas, what do you think the probability of a recession is at this point, given the massive jump that we've seen in yields and given the fact that maybe the Fed is not done yet?
- Well, I put the odds of a recession at about 50/50. And that's sort of in line with a number of the different indicators that you can see, which would be anywhere from 40% to 60% kind of chopping off the outliers. So it's still very much a toss up. And this idea of the lagged effect of rates just hasn't come in yet. And I think that's the thing that is the most surprising to people.
I mean, today's payroll number-- or not payroll number-- today's employment number was actually a bit weaker. And we're in the bad news is good news currently for that. But bad news can turn into bad news if it starts to accelerate, and instead of having gains in payrolls, you have declines.
BRAD SMITH: All that considered here, from what we're seeing in the wages within that payroll number as well, seeing a steepening decline in jobs this month. Nela Richardson said-- chief economist over at ADP-- additionally seeing a steady decline in wages in the past 12 months. What does that spell out to you about the consumer and how long that-- according to you and your notes, you had said that the consumer perhaps is not entirely in peril right now. But certainly, the situation is showing some weakening right now.
- Yeah. Well, you're absolutely right. And that came through in the numbers today and delivered through wages. And so as those soften and people start to feel as though they've already spent a lot of money and they've already had experiences and they've already said, you know, casting to the winds, what happens tomorrow or next year or five years from now? Eventually, if that becomes a biting enough, they will change their behavior.
But it does seem as though there's this room for the consumer to have changed as a result of COVID and as a result of the lockdowns. And that to some degree, at least there's been a short term change in the culture to have fun now and spend now rather than pulling in your horn. But that all does change if the data accelerates to the downside.