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Wall Street divided on Federal Reserve's rate hike path

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Yahoo Finance Live anchors discuss the expectations for the Fed’s next FOMC meeting.

Video Transcript

BRIAN SOZZI: Now here are three things you need to know right now. Traders will likely perceive a caution ahead of the Federal Reserve decision on interest rates on Wednesday. The Fed is widely expected to jack up rates by a hearty 75 basis points in a bid to stomp out inflation. This meeting in a slew of other economic reports makes it a very important week for the markets, and indeed, it does.

And I am locking in, first of all, a lot of Fed previews, a lot of Fed notes out here on Wall Street. And I'm looking at, I would say, this contrarian take by Evercore ISI strategist Krishna Guha-- he's been on with us many times. He's noting that we think the Fed judges that activity is resilient and remains focused on upside inflation management.

We expect something of a disconnect between the abruptly more optimistic tone in markets, like we've seen so far this month, on the inflation outlook and the posture the Fed will take at its meeting. And this is a tone that I'm not seeing in a lot of the other Fed notes out there this morning. A lot of folks in the Street expecting the Fed to lift rates by 75 basis points, maybe strike a more dovish tone in that Fed presser, in large part because there are signs that price pressures are rolling over.

BRAD SMITH: And this is going to come down to that pressure as well and the language that Fed Chair Jerome Powell decides to use even in that press conference, but particularly in going on further within this Evercore ISI note, they said that they think Powell is going to harden the message, that the Fed expects to take rates into restrictive territory, rates moving to 3 to 3 and 1/2% by year end, with a lean to more than 3 and 1/2% at this end of 2022.

And so, particularly here, they're hoping that this should dampen some re-emerging hopes of an early pause. And if we go into next year and some of the conversations that we've even had with economists, they were looking for the Fed to kind of retract from some of the more aggressive tenor that they've had to this point in time and a potential even cut on the table by the time we get into midway of 2023.

But for what we're watching right now, the Fed is still going to be full steam ahead, at least until they've hit some of the inflation targets. But I think Evercore not looking for that necessary pause once we get into next year.

JULIE HYMAN: Well, there's a lot of debate over this. I mean, Fed funds futures are pricing in a cut in the middle of the next year. There's at least a chance it's being priced in there. No surprise Mike Wilson, Morgan Stanley, remains bearish.

BRIAN SOZZI: My guess, he's bearish.

JULIE HYMAN: And right, well, and he's in this camp, saying there is not going to be that kind of a pause or that kind of a cut to rates. He says equity markets may be trying to get ahead of the eventual pause by the Fed. That is always a bullish signal. The problem is, this time, is that the pause is likely to come too late.

But JPMorgan is on the opposite side of that trade. Mislav Matejka is saying in a note that he does think there's going to be pivot in the second half of this year, both in sort of the economic data and also, then, in equities because of the outlook for the Fed to get more dovish, going forward. So, you know, you're getting a little bit of a disconnect or some debate on the street about some of these factors right now.

BRIAN SOZZI: I joked in today's "Morning Brief" newsletter that over the weekend, I paid $58 for a car wash. And I'm still seeing a lot of price pressures out there. At the Goldman event last week, over $500 for a one-night stay at a Hilton Hotel. Look, I know we saw the Philly Fed last week, price pressures maybe rolling over a bit.

But still, in consumer land, when you're actually out there, buying stuff, inflation pressures are real. So I tend to lean on the side of Mike Wilson, Guha, too. I think the market might be surprised by how hawkish the Fed sounds in that presser.

BRAD SMITH: $58 car wash.

BRIAN SOZZI: It's brutal.

BRAD SMITH: Your next MTA pass is on there.

BRIAN SOZZI: It's true. It was bad.

JULIE HYMAN: And on the flip side, are we going to see prices really start to be alleviated in things like apparel, right? Are we going to see some offsets start to really--

BRIAN SOZZI: I didn't see it in the mall yesterday.

JULIE HYMAN: --come in? I definitely have seen-- I mean, I was--

BRAD SMITH: Some discounting?

JULIE HYMAN: I shopped at Target recently. It wasn't discounting per se, but that stuff is cheap. So, I mean, I don't know that they call it discounting, but they might just, in some cases, be bringing the prices down. Speaking of bringing the prices down, one more note that we have to mention this morning is Lori Calvasina over at RBC, who is cutting her target for the year end for the S&P 500 to 4,200.

What her team did, she said they ran 10 different scenarios and back tests for economic growth for what was going to happen. And they came to 4,200 is the average of those 10 different scenarios here. And we have been seeing this on the street, right, a number of different analysts coming and cutting their forecasts.

She says all the-- one of the positive things she's looking at that we haven't talked that much about is the midterm. She says that could be a positive catalyst for stocks in the second half of the year. She says there's a tendency for the S&P 500 to inflect about a month before the midterms. And low levels of consumer confidence among Republicans relative to Democrats, that that tends to be a positive scenario. By the way, Lori is going to be with us later in the week, so we can dig into these comments a little bit further.

BRAD SMITH: Yeah, S&P 500 futures right now sitting at about 3,979, so we'll continue to watch that as we get closer to the start of today's trading activity.