The Fed’s job ‘isn’t done yet’ as inflation persists during bank crisis, strategist explains

BMO Capital Markets Chief Investment Strategist Brian Belski discusses the Federal Reserve's decision to raise interest rates by 25 basis points and breaks down the effects it will have on financial markets.

Video transcript

SEANA SMITH: All right, we want to bring in Brian Belski. He's here at the desk with us, BMO Capital Markets chief investment strategist. Brian, just getting this decision from the Fed. Your reaction, first take.

BRIAN BELSKI: Thank God. I'll say that. And Julie did a great job. By the way, I get the dream team here today. It's just amazing. I think that Julie brought up a really great point about in terms of they're not saying they're not done, right? And I think this 25 basis point, in our view, we were hoping that they would do that from a messaging standpoint because of the banking system. Their job isn't done yet. They still have to push inflation lower, period. And I think it really sends a great message. I think actually if the Fed did nothing, I think that'd be bad news. And I think the market would have really taken that in the wrong direction.


BRIAN BELSKI: Because then the Fed-- I think the Fed would be saying-- it's a great question, Briggsy. I think the market would have said, what do you know that we don't know? And what aren't you saying, right? Is the economy really in trouble? Are now are we going to start tilting? So whereas they're staying on their function in terms of going after inflation.

So the messaging, I think, is-- at least what we've heard so far. Again, we've been on these shows with you right after the Fed decision, and then it's really about the notes afterwards and what his press conference is. So this could be some conjecture. So let's see if his tone is less hawkish. I'm guessing it's going to be, but it's going to remain resolute with respect to what his plan is in terms of inflation.

DAVE BRIGGS: It's been unanimous constantly under this regime. Don't you welcome some dissent among the Fed governors? I mean, there is zero.

BRIAN BELSKI: If you go back to the '80s, we had some dissension. In the '70s, we clearly had some dissension. When Greenspan took over later on during the latter part of his tenure, especially after the pivot, Dave, in 1995, there really-- this notion of dissension kind of went away. I would love to see some dissension. And it's funny how even a year ago, we had much more dovish people on the Fed. Now they're all kind of in unison. I think maybe that's been-- maybe there's been some communication that they've been talking about in terms of being more clear. But at the end of the day, I think they're doing a great job in terms of staying consistent in their story in terms of, let's go after inflation.

JULIE HYMAN: And it seems-- we were just checking on the markets. We're not seeing that much of a movement maybe because people are waiting for the press conference. I'm sitting here trying to count dots on the dot plot. There's still-- I was saying that it looks like the terminal rate, according to the majority of the committee, is between 5 and 5 and 1/4. There were 10 dots there in December. There are 10 dots there now. But do you think that the hiking cycle, the shape of it has changed at all, given what we've seen with the banks?

BRIAN BELSKI: I think they're mutually exclusive events. And I think the Fed is telling you that as well. You know--

JULIE HYMAN: But why are they mutually exclusive events? Is it because it's been contained, and the Fed has said, that's-- we've done our job, and the other-- the Treasury, the Fed, the FDIC has done its job, and now we don't need to worry about financial stability?

BRIAN BELSKI: I think the notion and the common sense conclusion of we had a couple of bad apples is coming to fruition. And it's kind of like the movie "The Usual Suspects." Oh, by the way, yeah, they were the usual suspects. They got in trouble. For all intents and purposes, in our business in terms of investing, we have been questioning and wondering what was going to happen to the Swiss banking system since 2008. And when it was going to happen with respect to UBS and Credit Suisse, especially given all the money that's left Switzerland on the private wealth side and the change in the capital markets behavior in the last 15 years, Julie. So that isn't a big surprise, quite frankly.

The bad apples that went down and have been taken out-- and they got taken off for a reason. And I think the baby and the bathwater binary decision to sell off financials last week was a terrible decision. And we believe that financials are going to see the inverse of what happened in 2009, '10, and '11. What happened in 2009, '10, '11 is investors moved away from the big banks. You're the bad guys. This time around, it's going to be the inverse.

And I think that bodes well to our longer term theme in financials, which is scale, OK? So the money center banks, the Canadian banks, the asset managers, and the brokers are in very, very, very good position. So I think there's going to be massive consolidation. It's not going to be one of these things-- now I'm hearing this that America is going to have 10 banks, and no, no, no, no, no. Slow down, OK? We're still capitalists. We still have a lot of public money in terms of these banks.

And so, no, we're not going to get that concentrated, but the big banks are going to get bigger. And I wouldn't be surprised if you see a brokerage firm by a regional bank as well. You'll see something like that in the next few years.

SEANA SMITH: Are you seeing any investment opportunity within those regional plays right now? Or are you just waiting for the dust to settle a little bit?

BRIAN BELSKI: I think-- well, great question. I think you have to wait for the dust to settle, number one. I think it's going to be-- as I kind of think of it fundamentally, I think it's going to be the smaller ones that are more concentrated where you actually can get your fingers in the assets and know exactly what they own, OK, small cap banks, or the really big banks that have the balance sheet leverage in strength and multi-divisional assets. So it's small mid-cap banks that are more regional or more regionally associated with real deposit money, like Julie Hyman's money, for instance, versus Mark Zuckerberg's money, for instance, major difference. I think that's going to be--

JULIE HYMAN: Thanks a lot.

BRIAN BELSKI: Well, I'm just--


DAVE BRIGGS: So you mentioned "Usual Suspects," and touché, by the way. It was poof, and Keyser Soze has gone. Here, the writing leading up to this meeting was Jerome Powell is either going to focus on inflation or the banking crisis, with the conventional wisdom being that 25 could actually further worsen this banking crisis. Can it?

BRIAN BELSKI: No, I don't think so because the Treasury yields have already done that. The twos and the tens have already done that. And if you think about it, when you get a mortgage in the United States, it's based on the 10-year Treasury. That's number one. Number two, I think the terminal rate probably should be closer to 5 and 1/4 anyway. So I mean, if they would have done 50, that would have been amazing to me. Let's be done and then move on from here. Maybe that was the signal. But I think he wants to kind of play it close.

And remember, too, that we don't have a meeting next month. So the next meeting is May. We have a lot of data between now and May. And I think he's hopeful that the semblance of the lagging part of inflation could actually begin to tip over.

SEANA SMITH: We will see whether or not that happens. Brian Belski, always great to have you in studio, especially on Fed day.

DAVE BRIGGS: See you, brother.

BRIAN BELSKI: Thanks for having us.


BRIAN BELSKI: Appreciate it.

SEANA SMITH: Briggsy. I like that nickname, Dave.

DAVE BRIGGS: Belski and Briggsy, man. This could be a podcast. It'd be good.

BRIAN BELSKI: Oh, I can feel it.

DAVE BRIGGS: Belski and Briggsy.

BRIAN BELSKI: I can feel it.

DAVE BRIGGS: We got to do that.