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Why the Fed can keep raising rates ‘pretty aggressively’ in the short term: Economist

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Zach Griffiths, Wells Fargo Senior Macro Strategist, and Jeanette Garretty, Robertson Stephens Wealth Management Chief Economist, join Yahoo Finance Live to break down consumer positions amid rising inflation and the latest Fed interest rate hike and the significance of the latest unemployment rate reading.

Video Transcript

DAVE BRIGGS: We are just a couple of minutes away from the Fed Chair ahead of his press conference. Let's bring back Jeanette Garretty, Robertson Stephens Wealth Management chief economist, and Zach Griffiths, Wells Fargo senior macro strategist. And I want to get your reaction, Zach, to what you just heard from RJ Gallo. Will something break? Will we get to 4% by the spring?

ZACH GRIFFITHS: That's really the million dollar question. And we think that the Fed can continue to raise rates pretty aggressively before something breaks. You have a consumer that still has plenty of excess savings. There's a ton of cash in the financial system, as evidenced by the Fed's overnight reverse repo facility hitting new record highs every day. You're seeing [INAUDIBLE] rates come down.

So I think there are some factors in not only the economy, but financial markets, that will allow the Fed to tighten more than, perhaps, in other episodes, when we didn't have so much fiscal and monetary stimulus leading into a tightening cycle, like we had over the past couple of years. And so we do think that rates can go higher. The curve can flatten more before we have something break. And the Fed really needs to shift its policy tact.

SEANA SMITH: Janet, we know messaging is critical here from Fed Chair Jay Powell. What are you hoping, or what will you be listening for?

JEANETTER GARRETTY: Well, I want to hear the discussion about the real economy, because as we've seen in the last half hour, we tend to focus just on financial markets, equity markets, bond markets, whatever. I got to tell you, the question about housing is a really interesting one for me. I think it's the right question to ask because the single largest asset that most US households have is their home.

Everybody loves to play the parlor game of, how much is my house worth now, given the house across the street just went for 25% more. They're not going to be able to play that game. It's going to get tough to do the purchases, especially if the unemployment rate starts to rise. And there's been several Fed-- and Fed presidents have gone out and said, well, we think we could live with the 4 and 1/4% unemployment rate.

I think they could, but the question is, does it stop there? So housing is a big, very influential sector. I don't think he's going to talk about it. But I think this is going to be the subject at hand in the fall when consumers' savings are significantly depleted. And then the question is, now what?