The Fed’s balance sheet timeline is 'key' for this FOMC meeting: Great Hill Capital Chairman

Great Hill Capital Chairman Tom Hayes joins Yahoo Finance Live to discuss what to expect at the Fed press conference, including the balance sheet roll-off timeline, quantitative tightening, rate hikes, inflation, employment, and the outlook for the economy.

Video transcript

ALEXIS CHRISTOFOROUS: So I wanna hand it over now to Tom Hayes, Great Hill Capital's chairman and managing director. Tom, do you believe the Fed was transparent enough? And did they say what Wall Street needed to hear in order to put this bull market back on track?

TOM HAYES: Well, so far, so good, Alexis. We still have the press conference, and that's where the crazy things can happen. But the market is expecting three to four hikes this year. They're currently priced in. He may signal that 25 basis points looks to happen in March, which the market anticipates. The whole key to this meeting is going to be the balance sheet rolloff timeline. If you look back at January 5, you can trace basically the top of the market to the day that they put out the Fed minutes from December.

And the Fed minutes from December absolutely spooked the market because for the first time, they said, well, maybe we could do balance sheet runoff in line with our first rate hike, which everyone was anticipating is as soon as March. And that was completely unexpected. And since then, we saw a 12% intraday sell-off in the S&P 500, 18% intraday on Monday in the NASDAQ. And that's just too much tightening too quickly.

If you look at the last round of quantitative tightening, they waited a year and a half after the first rate hike to start the quantitative tightening. As soon as they started the quantitative tightening, within a year and a half, they inverted the yield curve, and we got a serious recession, obviously, compounded by COVID, et cetera. So we just really need to see them back off of that. So far, the market is anticipating-- we're looking at the S&P up 70 points-- that they will do that.

And they need to keep that in mind because all of the actions that they take, whether it's loosening policy or tightening policy, they're felt in the real economy on a lagged basis, six to nine months down the road. So start with the rate hikes. Do one, two, three hikes. See how the economy absorbs that, see what employment looks like, see what inflation looks like, et cetera. And then from there, you can start the balance sheet runoff at a slow, gradual pace. And I do think they can navigate a soft landing, provided they don't try to do too much at once.

ADAM SHAPIRO: When we talk about all of this and doing too much at once, we just asked the previous guest, what does rolloff look like? Since that's now going to be-- they've solidified what they will do in the second half of this year, as opposed to what you said, spooking the markets in December, and yet, we hit market highs after everyone got all riled. And then this week, we've seen all kinds of fear, panic, whatever you want to call it, knowing what's about to happen. So as we get toward March now expecting lift-off, are we going to go through another volatility, another cycle of hair on fire when we know, we've been told, here's what's coming?

TOM HAYES: Yeah, I don't think so. We did see some level of capitulation on Monday. We'll talk about that. But the key distinction is, is the event happened in December, but the notes came out in January. So until the market got wind that they were considering accelerating the quantitative tightening, the market acted fine. The minute that information got into the market on January 5 is when the market completely rolled over.

So provided they walk that back and they say, look, let's start with the hikes, let's do a few hikes, see how things go, and then we'll start quantitative tightening and balance sheet rolloff, then we should be fine. If they get back to this language of, "Let's start it all at once and see what happens. We've never done it before. Why not try now," obviously, you're going to see the type of results that we've seen.

But going back to that level of capitulation, we saw the AAII sentiment survey for individual investors, it hit 21% bullish last week, 47% bearish. So that was an extreme that you normally see around inflection points. You saw the put-call ratio on Monday at 1.26. Everyone was buying home insurance when the house was already on fire. You want to buy that insurance well before the fire starts. So that was a sign of inflection and capitulation. And the VIX got up to 38. I think now it's down below 28, just two days later.

So I think we're through the worst, provided the conference-- press conference goes smoothly, they kind of ease off on that quantitative tightening talk and timeline. The market is really set here. Earnings have generally been positive. We need to see a continuation of positive tech earnings in particularly because that group has been hit the hardest, down 18% intraday as of Monday. We saw it with IBM crushing the top line.

And following through the next day, we saw it with Microsoft Azure and Cloud up 46% year on year. And then the key thing was the good guidance and the earnings call. So we got followthrough on that today. And we're seeing the whole group follow through on the back of that news and then we have Apple tomorrow, which is going to play a critical role, kind of a trifecta in proving out that the earnings power is still there.

KARINA MITCHELL: All right, we will have to leave it there. Tom Hayes, Great Hill Capital chairman and managing director, thank you for that insight.