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At least one more Fed interest rate hike is 'likely' between now and spring: Strategist

Wells Fargo Senior Economist Michael Pugliese and Charles Schwab Chief Fixed Income Strategist Kathy Jones join Yahoo Finance Live to discuss the interest rate hike outlook ahead of today's Fed decision, the labor market, and market impacts from rate hikes.

Video transcript

[AUDIO LOGO]

SEANA SMITH: Mike, let me start with you. Just in terms of the market's reaction here, S&P just around the lows of the session. What do you make of the Fed decision and some of the language that has remained in this statement, ongoing rate increases appropriate?

MICHAEL PUGLIESE: Yeah, well, thanks for having me. And I think the way I think about the statement right now is it may be a touch hawkish but largely in line with expectations. It wasn't my view that this was going to be the last rate hike. We've got another one penciled in for March and then one more final 25 basis point rate hike in May. So I think at least one more makes a lot of sense. And that's what was reflected in this statement.

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Taking a step back from the path of policy more broadly, I think this is really a bide their time meeting for the FOMC where we've got two more CPI releases between now and the March meeting, two more employment releases. Obviously March will also have an update to the dots and the economic projections, which today's meeting does not. And that's really, to me, when the rubber is going to meet the road for the Fed, when they need to decide, will we hike one more time? Are we going to sit on hold for a while? What do we want to project for the rest of the year?

Right now, I think this makes sense with a Fed that's feeling good about where the data is heading. But they don't, by any means, feel that it's mission accomplished yet.

DAVE BRIGGS: All right, Kathy, let's get your reaction to the announcement. And this is what we do. We overanalyze language. So ongoing increases, does that suggest to you there are two more after this 25-point hike?

KATHY JONES: I think that's likely. I think the Fed's made it pretty clear that their target for the peak Fed funds rate is probably 5% to 5 and 1/4 percent. And that probably won't command a 25 basis point increments between now and the spring unless something changes pretty drastically. I think that that's what they've been signaling pretty clearly.

Any hopes that they might be somewhat more dovish I think were probably unrealistic at this meeting. A lot depends as things go forward. But I think that this was largely as expected and largely in line with what the guidance has been so far from the Fed.

SEANA SMITH: Kathy though, the case though, for holding rates higher by the Fed, is that case becoming less compelling to you, given the recent data that we've gotten?

KATHY JONES: Yeah, absolutely. So the Fed has talked about hike and hold and then recalibrate. What we're seeing is a lot of information suggesting that indeed inflation's coming down, that some of the things that they really worried about accelerating or not accelerating and actually moving in the other direction. So I think had it not been for the Fed being so far behind the eight ball in terms of starting the cycle, they probably wouldn't have to raise rates as much as they're planning to because we are starting to see wage gains slow down.

We're starting to see-- manufacturing is still very soft, with input prices declining and output prices declining, new orders declining. We're seeing some cooling off in consumer spending. And certainly in the global markets, we're starting to see some of the things that were worrying the Fed and other central banks, like high energy prices, have gone in the other direction.

So there's plenty of compelling reasons for the Fed to slow down at this stage of the game and even probably could build a case for stopping. But they have signaled so clearly that their goal is to get to this 5%, 5 and 1/4 percent and hold it there for a while. If they back off, that's probably going to be a signal that they are easy on inflation. And that's not the signal they want to send.

DAVE BRIGGS: Of course that pivotal Friday jobs number, Mike, could change everything. And how do you think this morning may have jolted, if you will, pun very much intended, the Fed 11 million job openings?

MICHAEL PUGLIESE: Yeah, I mean, it's certainly going the wrong direction. But I wouldn't put too much emphasis on the headline openings for a couple of reasons. First, when you dug under the headline of that, a lot of it was concentrated in a few industries, which maybe suggests some seasonal quirks or some other issues. So it was retail trade, leisure and hospitality, construction.

It wasn't necessarily a very broad-based increase in job openings across the economy. And you also saw quits edge down, which was another sign that I think was more consistent with some gradual labor market cooling. So the headline wasn't necessarily super-consistent with other labor market indicators of demand.

It wasn't consistent with the ECI report we got yesterday. Obviously we'll see what the employment report on Friday holds. But at the end of the day, it's not necessarily what the Fed's looking for at this point in time, as even higher openings coming off a high base.

SEANA SMITH: Kathy, let's take a look at the bond market's reaction. We're still off just about 6 basis points, not too far from 3.5. But I'm pointing this out because in four of the last five Fed rate decisions, the first move in the 10-year was actually reversed within the next half-hour once Powell started speaking. Do you expect that to happen again?

KATHY JONES: Oh, I think it's a risk. I actually think it's more of a risk at the short end or the intermediate part of the curve because that's where the market is not priced for the Fed to hit that 5%, 5 and 1/4 peak rate. So when you look at where two and three-year yields are priced right now, they'd have to really come down pretty quickly in order to meet those expectations.

So I think if there's a repricing in the market, it's more at the short end than it is at the long end, which really is going to reflect the expectation for slower growth and inflation. And we have this steeply inverted yield curve. The more the Fed ratchets up the tightening at this stage of the game, where there's already evidence of slowing inflation, probably the deeper that inversion is going to be.

So for 10-year yields, probably bounce around this 3 and 1/2 percent area. We'll wait and see what the data are in-- on Friday for the job market. That's probably going to be more of a driver of bond yields than what happens today.

DAVE BRIGGS: And Mike, what do you in particular, going to be listening for when Jerome Powell starts talking in about 20 minutes?

MICHAEL PUGLIESE: I think what I'll just be listening for is, does he push back on anything in terms of how the market's positioned right now? It's not my base case, sort of like I already said. I think this meeting is more about biding time, trying to get a little more data before going into that important March meeting.

But I mean, there's always a risk that the Fed views things differently, right? And so you still have just almost some event risk going into the press conference of maybe the Fed sees this differently, and they really want to push back on market pricing for interest rates, like Kathy was just discussing, or maybe the rally we've seen in risk assets. So that's really, I think, what would catch my ear is if the Fed is thinking about this a lot differently than the market is right now, whereas I think what's more likely is you'll just get a Fed that tries to punt, to some extent, going one way or the other on financial conditions.