Erik Lundh, Principal Economist at The Conference Board, breaks down the Central Bank's strategy for taming inflation and addresses concerns over an accelerating economic downturn. 

Opening Bell

Fed Expected to Raise Interest Rates by Half a Percent 

here to discuss is eric lund principal economist at the conference board erIC, the central bank strategy for taming inflation as we understand it and, and you know, what we expected to be, what is your take on it so far? Do you think it's going to be successful? I think they're going to try to make it successful, but I think that there are limitations in terms of what the Fed can actually do to tame some of the drivers of inflation. Um There has certainly been a demand component here in terms of some of the stimulus money that made its way into the economy in 2020 2021. Um but some of the drivers are seeing right now are much more supply side oriented. We're looking at elevated gas prices, oil prices, agricultural prices and there's only so much that the Fed can do to sort of arrest some of these, some of these drivers. So um, they're going to be aggressive, they're going to to move forward. I'm expecting a 50 basis point hike today, uh, and maybe another one in july. Um, but there are going to be some, some challenges in trying to confront some of the new drivers of inflation this year. How important do you think it is for the Fed to signal its ability to be agile in the next upcoming interest rate hikes while still maintaining kind of a hawkish stance, given that the reality is there is this concern and a growing concern that we could hit a recession if the Fed is too hawkish amid a time where the consumer might start to pull back? Well, I mean, the Fed has been trying to communicate that it's trying to raise rates to a neutral position, one that is neither facilitating growth or or hampering it. But it is, I think kind of a fine line to walk on the one hand, you're trying to push those inflation numbers down to the extent that they can uh and on the other, you're trying maybe not to trigger a recession, but I do think it's going to be important to watch Powell's speech today and and and the the press conference to get a little bit more guidance in terms of how cautious the Fed is being in, in terms of trying to to walk that tightrope and how committed they are to preventing a reception in 2022 2023 Let's let's talk about, you know, the taper and the and the Fed kind of reducing the balance sheet. What is your take on the Fed's strategy reducing the balance sheet? What, $9 trillion dollars during this time? Well, I mean, the last meeting, they gave guidance that they were hoping to reduce the balance sheet by about $95 billion mortgage-backed securities, they said that the strategy would look familiar uh that it would look like the strategy they implemented following the financial crisis, but we'll have to see if they decided to get more aggressive. There could potentially be an environment where they're selling off assets as opposed to letting them roll off. Um And that of course, we would have a more uh more of an impact on financial markets and work to cool the economy a little bit faster. The central bank, you know, when we look at it, it's essentially trying to execute a number of policies. Some are saying that it borrowed back from the 1970s and even the 1980s while reducing the balance sheet. Is there a concern about Powell's ability to kind of pull this, you know, strategy off while sustaining and to your point, the Fed wants to be neutral, but the idea would be at least sustained, some growth so that you don't go into a contraction here and you know, is there any proven models that we can look at that mirror or get close to kind of current economic conditions? Well, I mean, we do use quite a few models of the conference board. Um some are more sophisticated, some are more simple. Um it's very difficult and this kind of a volatile environment to get a reasonable result from, from a model. So there are, I think challenges there. Um but uh you know, following the Q one GDP number released last week minus 1.4% there, there's a lot of angst right now about the potential for a recession this year. And I really think that that is going to do the best that it can to to avoid that kind of a situation then let's talk about GDP for this year. What is your forecast for it? Well, we had been forecasting something close to maybe 3% or so following the pretty um ugly number that came out last week to be quite frank. We're going to be downgrading that we'll release our new number next week. But it's probably gonna be somewhere in the low tubes in terms of other factors that economists you know could be looking at or should be looking at to keep in mind going forward. What do you think? You know, is out there that we should be paying attention to. I mean the inflation story I think is the most important story in the economy right now. It's important to understand the drivers of inflation. Um We saw a lot of price pressure from durable goods last year and a lot of it was a supply chain story bottlenecks and getting things from one shore to the next. Um And into the US ultimately um this year, it's changing a little bit. We have to watch energy prices, We have to watch agricultural prices. The wage inflation story is still quite important. So it's important to to watch the labor market closely as well. Um All of these I think are going to guide the Fed's hand and are going to impact what kind of slow down. We're going to see in the U. S. Economy Naruing for a recession as well later in the year or again into 2023. I'm really glad you you again mentioned that a lot of this is supply side, an issue on the supply side that has caused inflation. But the reality is the only tool the Fed has is to control kind of the demand side of things which is what makes this whole kind of you know scenario so tricky right now we'll have to see what the Fed does and a few hours from now the tone that the Fed takes. But eric in the meantime really appreciate your insight ahead of the Fed minutes coming out later on today. Eric lund, principal economist at the conference board.