3 things that came out of the latest Fed meeting

Gene Goldman, Cetera Investment Management Chief Investment Officer, spoke with Yahoo Finance Live about the latest Fed meeting and policy statement.

Video transcript

EMILY MCCORMICK: Let's stick with the topic of the markets and bring on Gene Goldman, Cetera Investment Management chief investment officer, for more Gene, I want to ask you first about your response to yesterday's Fed decision because in your notes to us, you mentioned that the Fed needs to catch up in order to recover from 2021's policy mistake, to use your words. What would catching up look like this year in terms of the number of rate hikes and timing of balance sheet runoff for the Fed, in your view?

GENE GOLDMAN: Sure, and thank you. And Emily, thank you for having me on your show. Great. You know, one thing we told our advisors and our clients last year is that the Fed made a big mistake, that they kept claiming inflation was transitory. And throughout the year, we're pounding the table saying, it is not transitory. Look at the evidence, look at the evidence. So if you pivot to this right now, you know, yesterday, we saw, you know, three things coming out of the Fed's meeting.

Number one, you know, they took some uncertainty off of Fed rate hikes. They basically said we are raising in March. Number two, they talked about balance sheet reduction, basically reversing some of the quantitative easing, which bailed us out back in March of 2020. Great news there. But number three, we did learn some concerns that are really like, ooh, we got to bite our teeth a little bit to see what's going on.

Number one, they talked about inflation has gotten worse than December. Number two, there's really so much uncertainty around inflation. And number three, the Fed-- Powell said we are going to have to move faster than we did in the last expansion. So, to your question, what that means, we see that the Fed right now, the markets are pricing-- you look at the two-year Treasury yield. The markets are pricing in four to five hikes. We're probably on the longer side, maybe four, maybe five hikes.

The key question is, will it be at 50 basis points at one time? Will it be every single meeting? Again, lots of uncertainty there. But I like what Powell said. A great thing he said yesterday is, we will be nimble because we are watching data very, very carefully.

ADAM SHAPIRO: But for investors who are watching markets very, very carefully, how do-- help us understand how to position because if they're playing catch up, I mean, how long will this volatility, this up, down, up, down, with a slow trend down, continue? What perhaps level should we be looking at as maybe measures for us to jump back in?

GENE GOLDMAN: It's a great question. So, you know, this volatility ties into one of our key themes for 2022. Market volatility is going to be dramatic, these big swings. So what do you do? So clearly, you know, this expansion we're in now is very different than the last one.

The last one was long. It was stretched out. It was the longest in the history of our country, 128 months. In that environment, growth does well. This recovery we're in right now, it's going to be higher growth and more inflation. What does that mean? Really having a bias towards value companies, value sectors like industrials, materials, energy, things like that that do well in a reflation environment.

The other key thing is really diversification. Be diversified to multiple asset classes. The question is, how far can this pullback go? You know, the NASDAQ hit a correction, so did the S&P 500. With that said, though, a correction, as we all know, is 10% down. And we don't see a bear market at all in this environment. And there's so many reasons why. Number one, you can look at the consumer. Consumers are in really great shape, both on consumer wealth, both on low debt to income.

Second of all, you know, the Fed is removing stimulus slowly, but there's still going to be a lot of stimulus in the economy until they fully remove it. Third of all, supply chain issues will get better. We're seeing evidence of that already. Fourth of all, where we're seeing some of the sell-offs in the markets right now, it's been on the more risky side of the markets-- you know, in crypto, in the more aggressive parts of the market. Our perspective is that this is a valuation concern, not a fundamental concern.

And the last point, the bond market we always feel is the smartest part of the market. Bond yield spreads have widened a little bit, about-- based on our analysis that we tweeted yesterday, about 37 basis points. During most corrections, this averages about 395 basis points. So again, we're not seeing the breakdown yet, and we don't see a bear market any time soon.

EMILY MCCORMICK: Gene, I'm wondering, how much do you expect that the Fed's interest rate hiking and tightening this year is actually going to bring down inflation? Because many of the issues that we're seeing now as contributing to these price increases are supply chain challenges and virus related disruptions, neither of which are really able to be influenced that heavily by the Fed.

GENE GOLDMAN: Great question. The Fed actually came out-- do you remember-- go back to October of last year. The Fed in their September meeting notes, they said accommodative monetary policy has begun to exceed its benefits. And at the same time, they said this does not cure supply chain issues. Our belief is that supply chain issues will be alleviated to an extent later this summer. Part of it is, you know, as we start to pivot from goods purchases to services like travel, flying, all the fun things we haven't done in a while.

Also if you look at the Chinese consumer, Chinese New Year is coming up very soon. Historically speaking, their purchases of goods start to slow down right after that time period. So this is good news because then Chinese companies can help manufacture and help to open our supply chains. And if you look at data, we're seeing improvements there.

But again, the Fed is trying to tackle this inflation via supply chain issues. We just believe that, yes, raising rates will help it to an extent, but just a slowdown in terms of the economy. And this goes into our first theme. Economy-- the growth is slowing, but nowhere near pre-pandemic levels. So again, all of this together, it's good news for the economy. But we're watching things very carefully.

EMILY MCCORMICK: All right, we'll leave it there. Gene Goldman is Cetera Investment Management chief investment officer, and we thank you so much for your time.