Fed could continue rate hikes while juggling inflation and recession risks

The Fed has entered its quiet period ahead of its June meeting. Lakshman Achuthan, Economic Cycle Research Institute Co-Founder, joins Yahoo Finance Live to discuss his take on what the Fed will do next.

Video transcript

JULIE HYMAN: Let's bring him back in, Lakshman Achuthan who is Economic Cycle Research Institute co-founder. And I think Josh put it rightly that the Fed does not like to surprise the markets at all. And so and it seems the market has now come back to where the Fed might want it to be, because for a little while there we saw the majority of bets being placed on an increase in rates at this meeting. Does this seem-- does now the equilibrium seems to be restored?

LAKSHMAN ACHUTHAN: For the moment. I would say for the moment, right? The market got a little ahead of itself saying, hey, you're going to cut, you're going to cut. And the Fed had to say whoa, whoa, whoa, higher for longer. Like, let me-- how many ways can they say that?

And here I think there is a good-- as we just heard, the expectation of a pause or a skip. And part of it is that we got the budget deal done. And so the Treasury can now go out and issue. And they're going to issue, let's make no mistake about it. And that's going to do-- that's going to suck out some money.

And so that's going to be something that the Fed doesn't want to really get entangled with, I think, timing wise. So they can also with a little bit of softer data. Well, they got the hot jobs data, but then they got the softer services data.

They can kind of say, hmm, let's sit and wait. But I still think it's higher for longer. That wage stuff inside of the core is still the primary concern for them. Powell, bottom line, does not want to be the second coming of Arthur Burns who let inflation get out of control. He said I must get that inflation fighting credibility back for the Fed. And I believe him.

BRAD SMITH: Do you believe and to what extent do you believe that the Fed has to discuss the survey data that came forward even though we got a big headline beat on the jobs number last week?

LAKSHMAN ACHUTHAN: Well, I think they'll discuss it all. I think-- I mean, this is bigger picture. I think fundamentally they're not very good at forecasting inflation. I mean, it's not a secret, right? And so therefore, they end up being a bit more reactionary. And when you have that framework, there's the choice of two bad things, right? It's do I have a recession, and/or do I have inflation.

And I think of those two things-- you're saying I'd rather have the recession, and that's the path that the Fed is on in order to break the back of inflation. The only thing that can be surprising is if something breaks. And so we saw the banks, some of the regional banks earlier this year. And that wasn't big enough, or they were able to tape that over a bit. So they're on their course.

JULIE HYMAN: You mentioned the Treasury issuance. I saw an estimate somewhere this morning. Maybe it was on Bloomberg that the Treasury issuance and what's going to happen to rates as a result is the equivalent of a quarter point tightening. Does that sound right? And what's the mechanism? Like, how does that work?

LAKSHMAN ACHUTHAN: Well, I mean, they have to decide where are they issuing-- two years, one year, five years, 10 years. And then I'm not sure how the math works on that. But they're going to present risk-free bonds.

And a lot of people are going to at relatively juicy yields, and a lot of money is going to go there because they're going to say, eh, I'm not sure what's going on. It's not like it used to be where you didn't get a return on this kind of investment. And so there is a challenge.

I mean, yes, there are some stocks that are just knocking the cover off the ball right now without a doubt, and those are very exciting. But for a broad portfolio, you can't just bet on that. You have to do something more balanced. I think this is definitely a competitor. And it's going to suck some money up. And that's a tightening.

BRAD SMITH: Absolutely. OK, so now as we game this out, I mean, we've heard bank CEOs call for a Q3 2023 recession. Are we any kind of further aligned to that now or further away from it based on what we've seen?

LAKSHMAN ACHUTHAN: Well, look, I think directionally. So the primary thing I can offer is what direction, are we changing direction. And the answer is no. We're not changing direction. So it's still decelerating. How much? We can haggle about.

And then the question is where are we right now in the cycle. And I just shared-- we were just talking about GDP and GDP. And that data, which is very good hard data, suggests that we may have already slipped into recession that can happen with positive jobs growth. We've seen that in the 70s. It was nine months inside of the recession that we first had negative jobs growth.

And we also saw it in the 80s. It was four months into the recession when we first saw negative jobs growth. So then I say, well, how could that be? Why would someone be hiring people inside of a recession? Look, there's not that many people to hire, so I don't want to let them go because it's hard to get them back on the other side.

And look, I can kind of jam through my price increase. I have this kind of feeling that I still have some pricing power. So maybe I can make it work. But the reality is with inflation eating even the production of stuff making it more expensive, managers now are saying, all right, we're going to cut back on the workweek. That's that first edge.

If the workweek was going the other way, I think I'd have more of a challenge in my story. But the workweek growth is actually decelerating.

JULIE HYMAN: Are we seeing temp jobs also get cut down? Is that another leading indicator?

LAKSHMAN ACHUTHAN: Yes. Those are leading indicators and also discretionary stuff. So now when you look at earnings and even Apple, right-- Apple's going to talk about AI, they should, I mean, for all the reasons that we just heard. But is the phone-- I'm a big Apple consumer. Is that just non-discretionary or discretionary? And do I need the latest one right now? And that's a discretionary kind of discussion.

Maybe I need a smartphone, yes. It's non-discretionary. But do I need the latest one right now? Maybe that's discretionary. Advertising. Businesses will start to play around with advertising, try to redirect their dollars, minimize that stuff. So I think we are, and certainly, goods are just not something people want right now.

JULIE HYMAN: Unless it's yoga pants from Lululemon, apparently.


JULIE HYMAN: So there are pockets.

LAKSHMAN ACHUTHAN: There are pockets. There is a bifurcation in the consumer for sure.


LAKSHMAN ACHUTHAN: So let's watch those luxury goods. I saw anecdotally one of the luxury companies was having a little bit of headwinds.


LAKSHMAN ACHUTHAN: So that can happen too.

JULIE HYMAN: It's patchy. All right, thanks so much, Lakshman. Always great to see you. Lakshman Achuthan is Economic Cycle Research Institute co-founder. Great to see you as always. Thank