The Federal Reserve announced a historic rate hike Wednesday, with plans to raise interest rates by 50-basis points. The move comes as the fed looks to tamp down red-hot inflation, which sits at a 4-decade high. John Leer, Chief Economist, Morning Consult, joined Cheddar's Opening Bell to discuss.


Opening Bell

Fed Announces Historic Rate Hike to Curb Inflation

we're joined now by john Lear chief economist and morning consult john, what do you make of the Fed's move and by that, I mean really, you know, do you think this rate hike is enough to actually cool down inflation? Thanks for having me Alicia. So the Fed's rate hike this past yesterday is definitely not enough to cool inflation. In fact they've signaled as much right. So they're going to continue raising rates until they get to what they call neutral, which is an ambiguous topic, but it's somewhere around 2%. So I think we've got a series of 50 basis point hikes left to go. One of the real challenges is that, um, even though there's more room to go in terms of raising interest rates, the effects of this current interest rate hike won't be fully felt I think for another six months roughly. And so that's the challenge that the Fed faces right now is doing stuff now to try to tamp inflation later on in the year. You mentioned a moment ago, obviously the neutral rate, which is a bit kind of at the moment, it feels like a moving target, so to speak at times. Um you know, the Fed did make a comment about 75 basis point hike in particular kind of seemingly like Powell was ready for that question. And that's kind of, you know, the market reacted accordingly when Powell said, listen, at this point, that's off the table. Do you think he's correct to kind of, you know, established that that mindset right now. Just given the reality to your point there a moment ago that this is a bit of a moving target? And we don't know where it's going to land? Yeah, I personally sort of agree with this approach and I'll tell you why, I think because there's so much uncertainty right now, in particular, there's a lot of headwinds to growth. I do think it's appropriate for the Fed to move a little bit more. Let's call it in a measured way as opposed to sort of one off, you know, 75 point basis hikes. Um and so I think over time actually, the Fed is going to be able to see how their rate hikes are affecting financial market conditions and in turn how that's coming back in and starting to affect the broader economy And 50 basis point hikes give them that flexibility to do that. I get curious about a 75 basis point hike, especially when I think of the reality of inflation right now. I mean a lot of it is coming from sky high energy prices that are outpacing supply. Also, obviously food being a factor and we're seeing continued kind of, you know, holdups in the supply chain and even raw materials that relate as it relates to food, especially with kind of geopolitical uncertainty when it comes to oil and in particular, right, we know that oil companies obviously have control of the supply right now, is there anything the Fed can do to truly fight this and if they can't, then how do they truly, how are they truly able to tamp down on inflation? I think the short answer is that the Fed really doesn't have the tools to go directly fight supply issues like elevated gas prices, like elevated food prices. What the Fed's, you know, what the Feds toolkit allows it to do is to fight the demand issues when we continue to see particularly on the consumer front, just how robust consumer spending has been. And so the idea is that, you know, as the Fed raises interest rates, that's going to continue to tighten financial conditions, which in turn should start limiting um you know, some of the borrowing activity and cut down on some of the expansion and will ultimately see that funnel through to um to changes in consumers spending patterns. It's a long road. And I think Powell was actually humble enough to acknowledge just how daunting this task is, because so many of these headwinds are in fact outside of the Feds control and I team that question up to then help even the viewer understand the reality is we are dealing with an inflationary pressure that's coming from supply side, which is pretty unique and kind of our historical context of of this. And the Feds only tool is really on the demand side, which then makes it even more concerning when you talk about a recession and that's why you're hearing the chatter ramp up when we talk about a recession, right? I mean, There are some surveys out there that 100% of economists that are being surveyed are signaling we are going to hit a recession. Do you think that that's the case? Where do you fall in that, in that camp? You know, in terms of a landing, a soft landing or uniquely yesterday the Feds had a soft ish landing, which was a bit of a different tone. Yeah, words matter here. I think, you know, as Chairman Powell said, he said, you know, in principle a soft landing as possible. We, in our March outlook report noted that conceptually this sort of soft landing as possible. But in practice it's gonna be very difficult, It's like taking a boiling pot of water and trying to turn down the temperature just enough. So you get that sort of soft royal soft roll and and but but don't totally um take the punch bowl away as Chairman Volcker would have said. And so um you know, we view the likelihood of a recession as being elevated right now. So if this sort of standard unconditional probability of a recession is something like, you know, 10 to 12% we see it as triple that roughly right now. So closer to that 35% range. Um but I think the important thing is to know, you know, not all recessions are created equally. And so even though we might have a recession, the likelihood of it being deep and long is fairly low just because credit conditions remain on the consumer side in particular remain pretty, pretty robust, households are in pretty strong financial condition. And so it's hard to see how uh you know, a slowdown would turn into a protracted recession. And I ask you this because I think the game that a lot of us play post Fed comments is what does he really mean? What does a soft dish landing landing really mean to me, I think it means the Fed acknowledging that maybe we do have a recession, but it is a relatively mild one given how strong the consumer is right right now, is that kind of your take here? Yeah, I think what he's trying to signal is that, you know, this is gonna be really daunting, it's gonna be extremely challenging. But there's a lot of things that are outside of the Feds control, particularly on the supply chain front. And so what they're gonna try to do is slow things down and inherently that means to some extent bringing the economy to the brink of a recession. And if they can kind of skid through a fairly moderate recession and Land on the other side in 2023 with lower inflation and sort of more stable jobs growth and uh and income growth. And I think that that's, you know, a win for the event really quickly before I have to let you go here obviously to key points that hinge on us having that soft landing or softest landing landing, is the consumer being strong. And we do see, you know, showing that the consumer is relatively healthy and relatively relatively strong right now and the job market really staying as tight as it as it is and it's probably one of the tightest job markets that we have seen in a very long time. With that being said tomorrow we get the april jobs report. Is there any situation or scenario in this report or even an upcoming reports? They could sway the Fed's plan at all. I don't think so and I'll tell you why. So first of all we had the jolts report that came out earlier this week and we continue to see that job openings are, you know, record high vacancies are record highs and on top of that, you know, the the channel of influence how the Fed is likely to influence jobs growth is going to take some time for that to really materialize. So it's hard for me to see how for example, you know, today's or yesterday's 50 basis point hike could be interpreted as you know, affecting jobs growth this month, the following month or even the month after that. I mean it really will take some time for this blunt tool of monetary policy to flow through to jobs growth. And so I think the Fed is gonna be really hyper focused right now on inflation and inflation expectations and then also understanding more broadly what's going on in china and with some of these sort of global dynamics, I think I'm in the same camp as you there, john really appreciate your time and your insight, john Lear, chief economist at morning consult.