Dan Kern, Chief Investment Officer at TFC Financial Management joined Closing Bell to break down the Federal Reserve's aggressive rate hike amid historically high inflation.

Closing Bell

Federal Reserve Raises Interest Rates by 0.75%

The better news is closing bell. Everyone breaking news today, of course, the Fed raising rates by 75 basis points. And we are just moments away from hearing from the Fed Chair himself, Jerome Powell, after the biggest interest rate rise 3/4 of a percentage point since 1990 for as the Fed does aim to bring down sky high inflation, which is affecting every aspect of Americans lives. So joining me now is dan kern, chief investment officer at TFC Financial Management dan, thanks so much for joining on this uber important market day, especially for consumers as well. Do you think this will effectively get the economy on the right track? I think in the long term, this will get the economy on the, on the right track. In a lot of ways, I think today marks the end of the Fed's period of magical thinking. There's an acknowledgement, I think tacitly that the Fed is behind the curve uh and an acknowledgement that raising rates is necessary and rates will go higher than their previous dot plot estimated. They've also acknowledged that unemployment is going to go up and that GDP is going to go down as a consequence of what they're doing. And I think that's uh, those are big steps in the right direction. I'm glad you pointed that out. It's not every meeting from the Fed which generally meets about every six weeks or so, that we get these economic projections, but that was a key takeaway somewhat surprisingly. And of course this could be because consumers are still spending despite higher prices. The Fed saying that overall economic activity appears to have picked up since its latest meeting. Is that sustainable? I think I think we've got a bifurcated economy here and how long that lasts I think is an open question. But what we're seeing is lower income workers are really struggling. Um they are starting to run down their savings. They are disproportionately affected by rising food and energy prices. I think if food and energy prices stay elevated, it will be hard for those higher costs not to feed into higher income workers, But right now, I think middle and high income workers are have abundant savings. The job market is strong and they're still spending. Interestingly, there's a real disconnect between sentiment and what people are saying the sentiment is extremely low, but there's a disconnect between what people are saying and what they're doing because spending remains strong, spending does remain strong and in fact, in these economic projections, as well as bringing down GDP growth by about a percentage point for this year. The Fed actually raising its inflation outlook this year by almost a full percentage point. Do you think inflation as peak dan. Or could we continue to see prices rise even more For consumers than that? 8.6% that we saw in May. I think there's a real risk that things get worse before they get better. I think with the continuing war in Ukraine and and zero covid policy in china affecting supply chains. we could see things get a little bit worse but I would look for the inflation picture to start to get better in the fall but that means a challenging summer I think ahead. And what's behind that dan is it gas prices? Of course the summer a seasonally busy time. People are fueling up more often. Russia's invasion of Ukraine ongoing as well. So once we get to the fall, is it something that gas prices might start coming down? Are you seeing some inflationary peaks in other sectors as well? I I'm hopeful that we see that we see gas prices come down at least in the states. I think europe will be a different, different story. I'm optimistic that some of the ports slowdowns in china will ease by the by the fall. I'm hopeful that some of the issues with um the supply chain for autos starts to ease up um new and used auto prices have been a big part of the inflation story and I see inventories picking up and I think that should help pricing in the auto space come down. We are just a minute away dan from hearing from the Fed chair himself, jerome Powell after the Fed raising rates by three quarters of a percentage point after that hotter than expected inflation read on friday more of a rate increase that the Fed had previously broadcast of course as the data does continue to run hot. What does this scenario mean for the stock market? I think again, I I worry that things could get worse before they get better. There is still a very thick fog of uncertainty surrounding the economy and surrounding the stock market. And I think it's still until some of that fog clears, it's going to be a volatile stretch of time for for the market. I think we need clarity on chinese growth. We need a little bit more clarity on the implications of the Ukrainian war. I think we need to start to see inflation tangibly come down and until we get more more clarity, I think the market's going to have a bias towards going down. Um and a bias towards being at higher than normal levels of volatility dan. What is your reaction at Powell's remarks? It's interesting that he, that he talked several times about how the Fed is strongly committed To bringing inflation back to its long-term target rate of 2% and I think a little bit of what's going on here is that the Fed is under lot of pressure to quote do something. And I think Powell in particular is under pressure to prove that he is more paul Voelker, who was the head of the Fed, brought down inflation and Powell needs to show that he's more paul Voelker than Arthur Burns who presided over really a disastrous set of central bank policies That led to the runaway inflation of the 70s. So I think that's at work here. The market is responding positively so far although we've done a couple of round trips since the press conference began. But I think the market is happy to see the Fed move more aggressively but also happy to hear that the Fed is prepared to be nimble if if something changes in the environment. And Powell has used the word nimble several times in his press conferences. And I think the markets reading that as the Fed being willing to back off of restrictive policy if there is a significant growth scare or if inflation starts to come down more rapidly than today's projections would indicate. So it is interesting because at one point the Fed chair saying that he doesn't anticipate rate hikes of this kind 75 basis points or three quarters of a percentage point to be common But also indicating that the Fed might act to the same degree. Another 75 basis point rate rise in July in an attempt to bring down soaring prices just by raising rates stand is that as simple as it gets can that alone bring down soaring prices. If only that were the case. And certainly the Fed is focused on core P. C. E. Which excludes food and energy prices. But out here in the world, food and energy prices matter a lot to most consumers and the Feds got I think very little power to affect food and energy prices. Um I think that the supply effect on energy is much stronger than any demand destruction that would come from higher interest rates. So the Fed is I think pretty powerless on those, on those dimensions and I think they're, they're hoping that they've retired the word transitory, but I think they are hoping to see some healing in supply chains and some pick up and supply of oil and gas. I think part of this is um, they're trying to get out ahead of expectations so that expectations don't become anchor a nang curd and then using real world real world world language. The Fed is worried that that consumers will start to expect high levels of inflation to continue, which could feed into wage demands, could feed into pricing pressures that become more permanent. And I think by taking these steps, he's trying to get out ahead and keep those expectations more more anchored than they've been in the last few weeks. That is the risk that it could become a vicious cycle dan quickly before we have to finish this hour. You are chief investment Officer and what are you advising your clients during these volatile times. So I'll start with be patient. Don't panic. I think that maintaining well balanced portfolios, taking advantage of dislocations to invest in things that have sold off pretty severely. I think we're on the equity portfolio. We're looking for companies that will bend but not break in a recessionary environment and in the bond portfolios were looking more shorter term. There's more value in shorter term bonds than I think there is today in longer term bonds. All right, dan Curran, chief investment officer at TFC Financial Management, dan, Thank you.