Economist Luke Tilley Talks Navigating Market Volatility, Bank Failures and Fed Rate Hike

Luke Tilley, the chief economist at Wilmington Trust, joined Cheddar News to discuss the state of the economy, the Fed's rate hike in the midst of market volatility and bank failure concerns. "So on the more encouraging side, we do see goods prices coming down. We think that the shelter indices part of CPI and PCE will be coming down because we've seen the turn in housing prices just in the market data," he said.

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Economist Luke Tilley Talks Navigating Market Volatility, Bank Failures & Fed Rate Hike

Joining us now is Luke T he's the chief economist at moment Trust. So, Luke thank you so much for joining us. What is your take on today's market action? Everything ending the day in the Green. Yeah, so obviously a very strong day in the markets and because of some, some of those market fundamentals, um and we think that those are positive developments, but ultimately, for us, it's going to come back to a macro story. It comes back to how the regional banking situation is going to play out what the fed is going to have to do with interest rates. And I think key there is inflation. You know, we just heard about that travel spending which is so strong and really boosted carnival. And with their report, we still do see consumers with a lot of cash on hand and willing to make those purchases. And that's one of the things that's keeping inflation uh sticky to the upside. So that's one of the main challenges right now, but obviously a good day in the market today. Now, I wanted to touch on one of the recent headlines that we've been seeing and that's concerns over the US banking sectors, recent issues are starting to ease but how should investigators, investors navigate the situation going forward? Yeah, we are monitoring financial conditions. Obviously, this is key. This is exactly what the fed is trying to do is to tighten financial conditions, to put a lid on GDP growth, bring it down and also put that lid on inflation. And what we see with the regional banking sector is, you know, some amelioration of those conditions. We haven't seen as much deposit played over the past few days as we saw originally. But what we think is that that banks are going to pull back on lending to some degree and that's going to apply even more pressure to the economy. And that's really the concern right now is that it really could push down on growth even more. And I think that that's why we saw the fed just raised by 25 basis points and also express a lot of uncertainty about how much more they're going to need to raise because essentially the situation with the US banks is doing their job for them. Now we do see that core service inflation is remaining a little longer than usual. Do you think this still means that a recession is looming? Yeah, it's definitely the sticky part of inflation. So on the more encouraging side, we do see goods prices coming down, we think that the shelter in the sea part of CPI and PC will be coming down because we've seen the turn in housing prices just in the market data. But those services outside of shelter, as you say have remained to the sticky side and it's really on recreation, it's on travel. It's those things that you were just mentioning for carnival because people do see still have strong job growth and a lot of savings and that's where the stickiness is, is they're still being able to pass on price increases in those sectors. So, if that remains frustratingly high, if it's enough to keep the over inflation numbers high, then it continues to be a problem and we're going to need even tighter financial conditions. Now, let's go through the Fed which pushed through its latest rate hike last week and, you know, the decision really wasn't surprised Luke, but there's still some division amongst financial experts, whether or not it was the right move. So, what are your thoughts on what the Fed has done? And how should investors be thinking going forward? Yeah, I think they were in a pretty tight spot there because even if they didn't want to hike rates, if they didn't do it, then people would have gotten worried about, you know, what does the fed know that we don't know what's really the situation going on in the banking crisis to remember that was just 10 to 12 days old when they met. But I think they've put themselves in a position now where their guidance, their forecasts are only calling for one more hike over the course of this year. And of course, there's a lot more meetings left this year. So they've gotten themselves in a place where they can pause if their read is that the banking situation is getting away on growth and that they need to be a little bit more cautious. And they also have those projections for rate cuts into in next year, about 75 basis points according to the median. So we think investors need to be watching the direction for inflation because that ultimately is going to drive what the fed does. We're a little bit on the cautious side right now, a little bit underweight to equities, especially us small cap and international development because we still think that there's a lot of uncertainty and there's some downside risk Michelle. Now the P or the producer price index also came in lighter than expected recently, which means that costs may be passed on to consumers. So what should this mean for people and their budgets? Yeah, this is really encouraging. I think the PPI those price pressures for businesses just in the production of their goods coming down and their services coming down. Even on the service side, the producer prices really easing the challenge is that if customers are still willing to pay, if they still do have those strong job growth, wage growth and those savings that they can still take on higher price increases and it would just mean higher margins. So that might be good for the firms that are able to pass prices on. We see some of those stocks moving up today, but that would translate to higher inflation. So it might be good for some stocks in the short term, but challenging or the longer term as the fed needs to hike even more to get it under control. So ultimately coming down to inflation, but those PPI numbers are definitely encouraging before we go. Are there any sectors or companies that you are keeping an eye on or that you recommend to investors? Yeah. Well, we're a neutral to us. Large cap and our underweight is to smaller cap companies. And that's because the small cap companies are more levered to the to the cycle. You know, they've got a higher beta. If we do see a downturn, the small cap is going to get hit even harder. And in terms of investment factors, we favor high quality companies, those with strong balance sheets that have a pretty steady flow cash flow, low debt because those tend to do better in cycles like this when the market is sort of up and down and kind of flat and not really performing. And that quality factor really tends to do better and that's where we're focused right now, Michelle. Well, thanks so much to Luke. He's the chief economist at Wilmington Trust.