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Fed has been 'notoriously bad' at committing to forward-looking plans: Strategist

Kristina Hooper, Invesco Chief Global Market Strategist, joins Yahoo Finance Live to discuss the Fed's potential plans for future rate hikes and how consumers are faring amid inflation.

Video transcript

SEANA SMITH: So let's talk about what all this means here for the broader market, what it could mean here for the Fed going forward. For that, we want to bring in Kristina Hooper, Invesco Chief Global Market Strategist. Kristina, it's great to see you again. So we got the Fed minutes. We saw the reaction in the markets today, although we are pulling off the highs of the day. Anything that you heard or read in the Fed minutes that makes you change your mind just in terms of the policy that we could be expecting over the next couple of months?

KRISTINA HOOPER: Absolutely nothing, but that's because I've always believed that sooner rather than later, the Fed is going to need to pivot to a less hawkish stance. That doesn't mean it's going to stop tightening, but it is going to pursue a less aggressive path. And we got hints of that in today's minutes release.

What we saw was a Fed that is concerned about time lags, right-- that we haven't necessarily seen the full negative impact of tightening thus far. And we also saw a Fed that recognizes that it needs to, at some point, pivot. Now, of course, some got hung up-- the hawks got hung up on language like eventually, at some point-- I think it's key to recognize that the Fed has been notoriously bad at descriptions around time, right? Think about the term transitory. So I'm not so worried about words like, eventually. That could happen sooner than we think.

DAVE BRIGGS: Yeah, again, I'm reading through this, for some time. But they've been very clear that they're going to be data-dependent. What do you think it would take to be less hawkish down the road?

KRISTINA HOOPER: So I think what they are primarily focused on is core inflation, which we know is much higher than we want it to be, but has shown signs that it's peaked or is at least peaking. And also, we can't forget inflation expectations. We've heard the Fed over and over again say that they want to see longer term inflation expectations well-anchored.

And what we got from July Michigan inflation expectations-- that's the read on the consumers-- their expectations for five years ahead was 2.9%. I think it was really quite a development that it had a 2 handle on it. And I think that's very, very comforting.

We want to see that continue to move in the right direction. So we'll be waiting for that final survey from August, those results. But I think it's data like that that can really encourage the Fed to err on the side of a little less aggression and go with 50 basis points in September.

SEANA SMITH: Kristina, you mentioned the Fed's read on the consumer. We got the retail sales number out this morning-- little change, essentially flat in the month of July. What's your assessment of the consumer and what we'll likely see as inflation does remain extremely high?

KRISTINA HOOPER: Well, it's a tale of two consumers, clearly. Lower and middle income households are under more pressure because of high levels of inflation. The good news, though, is that we've seen headline inflation ease, right? We've seen, in particular, energy prices come down somewhat in the US. The pain at the pump has been alleviated at least a bit.

And so what that says to me is that the consumer is going to continue to spend. They might be more selective in their spending. But let's face it, it remains a very tight labor market. And so this is a situation where I don't think we're going to see the consumer collapse so long as we don't see a dramatic increase in unemployment.

DAVE BRIGGS: Your most recent note, Kristina, describes the economy at a crossroads. What's going to be the catalyst in either direction?

KRISTINA HOOPER: Well, for me, I think it's going to be all about the Fed and just how aggressive they remain. Because they really do have the power to essentially choke this economy and send it into a recession. So so much will be dictated by the Fed. Luckily, they continue to articulate a real commitment to being data-dependent and being sensitive to incoming data.

And I think that's all we can hope for. That, to me, is how the Fed turns monetary policy, which is notoriously regarded as a blunt instrument, into more of a surgical tool. It's still a blunt instrument, but it can be a bit more surgical if they are sensitive to incoming data.

SEANA SMITH: So, Kristina, what does all this mean for the average investor out there? Where are you finding the smartest or the most opportunity right now?

KRISTINA HOOPER: Well, so, first of all, I think our thesis that the economy is going to slow but is going to avoid recession causes us to be risk neutral tactically-- with a slight overweight to equities, but overweight in defensive equities. And by that, I would include in there tech and health care. There are some real opportunities there. But I think we want to be very selective and find those companies that are able to successfully defend margins by passing on prices.

And I do think areas like technology-- many of those industries are going to be winners in that regard. But again, it's all about selectivity. But also for investors, I think we need to think about the longer term and focus on our long-term , goals remain invested, don't get spooked and abandon this equity market.