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The Fed shouldn't 'give up on forecasting' or trying to prevent a recession: Strategist

Steven Wieting, Citi Global Wealth Investments chief investment strategist, joins Yahoo Finance Live to discuss the Fed's next potential monetary policy move and why they shouldn't stop trying to prevent an economic recession.

Video transcript

RACHELLE AKUFFO: Welcome back to Yahoo Finance Live, everyone. Let's take a look at how the markets are faring, currently trading mixed at the moment. We see the Dow is the only one in positive territory right now. The S&P 500 and the NASDAQ still down about 0.2% there. Well, joining us now is Steven Wieting, Citi Global Wealth Investments chief investment strategist. So we saw in your notes, you were talking about seeing a recovery from a recession that hasn't actually happened yet. So break some of that down for us.

STEVEN WIETING: Well, that's what we shouldn't exactly be looking at this period as. We shouldn't be thinking of this as some new refreshed economic recovery. It is a period in which we've had a lot of employment and profit growth just behind us. We did have a sequential drop in real GDP. We had deceleration in the actual spending in the economy. But this is not the same thing as pervasive declines that have taken the economy down to a low level.

This is not a period of depressed corporate profits ready for a great big rebound like we were in the second half of 2020. So we don't want investors to think that we should start taking a great amount of cyclical risk again. And that's sort of the point.

DAVE BRIGGS: Steven, good to see you. The word out of the fed these days is data dependent. That is their new buzzword. And that's what Mary Daly from the San Francisco Fed told CBS over the weekend, asked about a 50 point hike. Said she thought that was likely but wouldn't rule out a 75. And again, we need to be data dependent. We're far from done. What do you think would be required to change the calculus of the fed from between a 50 and a 75 point hike in September?

STEVEN WIETING: Well, I would just say first off that data dependent is a lot better than being on autopilot. So it's nice to see that language change a little bit. Talking about how much work they have to do is still a little bit troubling because we see that the peak-- well, sort of the optimal lag time between expected changes in monetary policy and the full cyclical effect on the economy is about 18 months. What's happening in new and existing home sales transactions right now doesn't have a lot of economic effect. They're declined 26%, which is no small number.

But the effects on construction and employment, and the consumer spending that goes into moving into a new or existing home, all of that is still to come on the economy. So just go back and look at what Chairman Powell said at his Jackson Hole event a year ago, the August 2021 speech that he gave. And it was very much focused on the potential of missed timing monetary tightening with its peak impact.

And those are the sorts of things that I worry about right now. So we had strong employment data in reality. I wouldn't worry so much to say that the July report was such a wonderful thing. But we've had gains all year long that are very, very substantial. And just as you're showing on this chart right here, we actually don't see any lead time at all. The labor market doesn't tell us when a recession will begin.

In fact, when we reach our lowest levels of unemployment, that's actually when we mark recession timing. So I think, again, for the Federal Reserve, they should really be trying to look ahead. They shouldn't give up on forecasts. They shouldn't give up on trying to prevent, again, a recession or a surge in inflation. The surge in inflation was very much about what they did last year, easing during a boom period. And they should see that, I guess, the seeds of a slower inflation period have already been planted, and that we're going to have a deceleration, a probably strong deceleration, in the economy in the coming year.

SEANA SMITH: Steven, what do you think the market is pricing in, just in terms of what we should expect in September? Are we looking at 25, 50, 75? What do you think the market is anticipating?

STEVEN WIETING: The market is priced a little bit closer for a 75 basis point rate hike rather than 50. If it was 50, it would be a little bit of a surprise at this point. And you'd have to wonder what data it was that might get them to go 50 rather than 75. I'd bear in mind Wednesday's inflation report, the CPI. The headline reading looks like it's going to get a very big drag from the drop in the gasoline price.

If some of those other core components that have still been giving us trouble, if they were to rise a little less, it might be helpful. But this is really not the kind of data that we do we really want to actually prefer to run monetary policy off of. I would take a look at what's happening to retail spending. And we ended the third quarter with negative momentum. We've had a rise in unemployment insurance claims, which doesn't happen when the economy is operating at its full potential.

If we saw more of that, then it might be better to take it a little bit slower, or at least think, again, about a pause in terms of the tightening. But even that is hard for the Federal Reserve to do when they're tightening with two tools at once, when they're tightening with their balance sheet, which has only begun, again. But they're talking about rapid pace of balance sheet reduction, $95 billion per month when we get to the peak.

DAVE BRIGGS: And Steven, quickly, in 20 seconds or so, you mentioned energy, gas has come down $0.60 in a month. What are you expecting Wednesday from that CPI print? The expectations are still an 8.7. And how do you think the markets react?

STEVEN WIETING: Look. I think we have potential for a little bit lighter CPI reading for the month of July. I think that the headline could be closer to zero. I think markets are all about at this point everybody got beared up on a recession. They might have some short covering. They might have a little bit of joy. But that's not going to stop a slowdown in the economy.