Federal Reserve was very clear that 'the job is not done': Strategist

U.S. Bank SVP & Public Markets Group Head Lisa Erickson sits down with Yahoo Finance Live to talk about the Fed's latest rate hike decision, Chair Powell's commitment to the inflation-fighting mission, and stock rallies seen amid the latest rate hikes.

Video transcript

SEANA SMITH: Let's talk a little bit more about this. We have Powell's press conference here that just wrapped up. Lisa Erickson, US Bank senior vice president and public markets group head. Lisa, I want to start with comments from Chair Powell here on the possibility of more rate hikes and get your thoughts on the other side. Let's take a listen.

JAY POWELL: Continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. In addition, we are continuing the process of significantly reducing the size of our balance sheet. Restoring price stability will likely require maintaining a restrictive stance for some time.

SEANA SMITH: Restrictive stance for some time, but of course, Lisa, he did say he was noncommittal in terms of the Fed funds rate and exactly what that is going to look like here for the remainder of 2023. Some are viewing this-- looks like the market, at least, is viewing this as more dovish than maybe some had anticipated. What's your reaction?

LISA ERICKSON: So, to your point, Seana, the Federal Reserve was really quite firm in both its statement, as well as its opening remarks, really just focusing on the fact that the job is not done, ongoing increases, and really emphasizing that they want to make sure that that inflation rate comes back to the target of 2%. What happened, though, as the press conference was evolving, is, as some of those questions were asked to clarify the way forward, there was some more nuance in terms of looking at the underlying data.

So for example, noting that while financial conditions have eased in the short-term, the Fed is really looking at it on a longer term basis and so, therefore, was perhaps not as hawkish as it could have sounded on that matter, in addition, noting that there are countervailing forces on the labor market. While, again, it's not fully normalized yet, noting that we've made some progress. And so what I think you see is the markets reacting to some of that lack of clarity and the push and pull of data, as some of those remarks were clarified.

DAVE BRIGGS: Lisa, does the market reaction surprise you?

LISA ERICKSON: So, initially, when the statement came out I would have guessed that we would have had a more strong reaction from the market, just in terms of the reaffirmation that the Fed, again, is very committed. However, in light of some of these clarification questions and hearing that the Fed is debating some of these push-offs and trade-offs, it isn't surprising that the market is rallying. And you do have some momentum in terms of the positive sentiment that has increased. And so that combined, again, with some of the lack of clarity is giving the market room to run.

SEANA SMITH: Lisa, what about the comments from Fed saying-- from Fed Chair Jay Powell saying that he continues to think that there's a path to getting inflation back to 2% without a significant economic decline or significant decline in employment? Do you agree?

LISA ERICKSON: Well, certainly, there are possibilities that we may have more of a soft landing on the horizon. When we look at just recent numbers, even this week in terms of how the manufacturing and goods and services sectors have been evolving, what we see is that consumers actually have remained relatively resilient, even though there's been some signs of softening, and businesses are still spending. Again, some of the reports not just on the macro front, but from companies across the board are indicating there are ongoing investments in CapEx.

And so with that and the fact that we started this recession in a relatively strong economic and financial condition versus prior downturns, certainly, again, more of that slower growth scenario as a possible as opposed to a very difficult recession.

DAVE BRIGGS: We've talked about what the markets expect, Lisa. What is your expectations in terms of further rate hikes this year and when, in fact, they will begin to cut?

LISA ERICKSON: Well, we're still cautious overall on risk-on assets and stocks and simply because, again, it's not clear the trajectory of interest rates. And certainly, the Fed has continued to emphasize despite the market reaction, again, its commitment to remain restrictive. On top of that, you have the fact that even if there is a pause sometime later this year, monetary policy does act on a lagged effect.

And so you have this situation where we're likely to see some continued softening, both in economic indicators as well as company earnings, and yet the market is still being relatively optimistic on what's going on in terms of how to price out company multiples. So that really does give us reason for caution because we do not see necessarily a path clear towards easing conditions.

SEANA SMITH: So, Lisa, what do you think this all means, then, for equity behavior then, at least in the short-term, as we do wait to see all this worked out? Do you expect to see more of that volatility that we have become accustomed to?

LISA ERICKSON: In the short-term, what we really see is we're in what we would call a shoulder period. So if you step back and take a bigger picture perspective on what's happened over the last period since we've been in this unusual situation of the pandemic and reopening, we had a first repricing where, essentially, the stock market fell as they-- multiples came down and interest rate increases really began to take effect in the economy.

Now what we see is, we're really in a period where people are hopefully anticipating an improved monetary policy environment. And so, again, there's that positive sentiment despite the fact that we're still seeing slowing in the number of indicators across the board. We do still see, however, wedged on either end of that shoulder period, again, the potential for what we would call a second repricing, this time, again, based on earnings continuing to come down. And what we see is that while those estimate revisions have begun for 2023, they still seem relatively high, again, just given the amount of decline we've seen in activity and the lag effects of policy.

DAVE BRIGGS: And so, Lisa, as we close, how do you position yourself, how do you invest into that backdrop?

LISA ERICKSON: Right now, we're urging our clients to be cautious. And that means really being relatively underweight equities and then overweight higher balanced types of asset classes, like higher quality fixed income and also real assets. And both of those latter two asset classes, what they have in common is relatively higher income that on an ongoing basis, as, you receive that, can buffer the portfolio from underlying price declines.

DAVE BRIGGS: All right, Lisa Erickson, US Bank senior vice president and public markets group head, thanks so much. Really appreciate that.