Fed: Economy 'still strong enough' to allow another rate hike

Fed officials could vote in favor of another interest rate hike at the June FOMC meeting, says CI Barrett Private Wealth CIO Amy Kong. Kong sits down with Yahoo Finance Live to explain her take on the Fed's next move and how she is playing the AI wave.

Video transcript

SEANA SMITH: All right, here with more on what to expect from the Fed next week and the market implications. We want to bring in Amy Kong, CI Barrett Private Wealth Chief Investment Officer.

Amy, it's good to see you here. So we just heard from Jen Schonberger that Fed officials are split. Those who have voiced their decision, many are on the side of the need to raise rates once again. Some are saying, it's time to pause. What do you think makes the most sense to do now?

AMY KONG: Hi, guys, thanks for having me. I think I wouldn't be surprised if we saw another hike next-- at the next FOMC meeting. We very much saw a very strong jobs report last week. And we also saw that the Bank of Australia as well as Canada both raised. And the idea is inflation is still high compared to the Fed's target rate. And the economy is still strong enough, still provides us that flexibility to raise rates. There's still strength in the jobs market, wage inflation, you name it.

And so, again, I would not be surprised if the Fed were to raise it one more time by 25 basis points.

SEANA SMITH: Yeah, what is your expectation now on how high those rates can go and how long they're likely to last?

AMY KONG: Yeah. I think the Fed is looking at data points. And so are we. It's hard to project out, with, you know, every data point being so critical. And again, based on what we're seeing with the jobs report that we saw, as well as some of the previous CPI numbers, it just seems like the fight to control inflation is not quite yet over from what we're projecting out.

SEANA SMITH: What do you think the market implications are for this are they priced in order to be able to handle another 25 basis point hike if we do see one next week.

My speculation is that the market might not like it. You know, as you've pointed out and others have pointed out, the Fed funds futures are suggesting that over 70% of participants think a pause is likely for the next FOMC meeting. And so if the Fed is to raise it, I think the market may certainly reflect prices downwards as a result of that. But I don't think necessarily that we would, you know, see a huge market downturn perhaps.

You know, we've also seen the market rally to this degree at the top end of this range that we've been seeing. It really would not be a surprise to us if participants took some profits off the table as well.

AKIKO FUJITA: Let's talk about what we've been seeing in the markets. It feels like we're back to sort of tech being a big crowded trade here with AI being a big focus. How have you been approaching that in terms of an investment side of things? And is it really still about the big names like Nvidia or Microsoft?

AMY KONG: Yeah. We see AI as part of a very long mega-trend. And so we do think that having exposure to this trend makes sense to us. Nvidia is obviously the top way of getting into this particular trend, if you would. And we do have ownership of that stock. We like Microsoft as well, not because they're making any chips related to AI, but certainly, they are making the right investments.

And, of course, you know, with regards to Google and others, you are still having-- you will have some exposure as well. But our top exposures would be Nvidia as well as Microsoft. And Nvidia is an interesting play to us because not only is it going to capture the benefits of this AI trend, but other types of trends as well, whether it's cryptocurrency. I know it's taking a little bit of a lull at this point.

But certainly, any kind of trend that requires more and more semiconductor chips, whether it's gaming or what have you. I think Nvidia would be a very good and benefit of these types of trends

SEANA SMITH: Amy, what do you make about the broader hype excitement around AI that we have certainly seen over the last several months. Do you think some of that seems to be a bit overdone at this point?

AMY KONG: I think there's likely to be some momentum fading at some point. And there is risk that, you know, ultimately some of these AI-driven results may actually be a risk in the sense, that some of the outputs that we've been seeing could, you know, be wrong or factually needs improvement. And there could be some headwinds along the way.

But as a trend for the longer term, I can understand that there is hype to it. This is a very long-term kind of trend that we can see being applied not only to technology, but to a lot of industrial and a lot of typical companies as well. And so this is definitely a little bit broader than, you know, crypto or anything that we've seen in the past.

And so we can understand the excitement but we are also very selective that, you know, you certainly want to pick your price points in terms of getting into some of these stocks that I've mentioned as well.

AKIKO FUJITA: And the question I think a lot of people are asking, you know, aside from the names like Nvidia and Microsoft, how do you pick that price point to get in on is? It about profitability? I mean, what are the other things in the wide swath of names that have used AI as a buzzword, you know, who do you know where to put your money behind?

AMY KONG: Absolutely. And that's why we try to stick with some of the larger companies because you certainly can get it wrong if you stay with smaller players or, you know, certainly, a lot of these players are not even publicly traded. So the universe of names out there is somewhat limited. And we try to stick with the larger players just because we don't have crystal ball to understand when's the best time to get in.

We just know that for a company like Microsoft as another example, while we certainly like the AI trend, we also realize too that Microsoft is just a pure innovator in that sense. And that they have the wherewithal to make the bets on behalf of investors into AI and other types of trends.

And so that, to us, is an appealing attraction and then as well as Nvidia. I recognize that the price may not be as attractive today, but certainly if you look at the history of Nvidia, you will find a windows of opportunity to get in.

Again, this is a very interesting trend, but it does whipsaw back and forth. And I would encourage investors to not necessarily put all their eggs into one basket immediately, but really divide their money into tranches in terms of getting into names like Nvidia, which can be volatile.

SEANA SMITH: I mean, speaking of diversification outside of technology, how are you advising your clients in how they should be positioning their portfolio?

AMY KONG: Absolutely. So we typically look at individual stocks and we wouldn't wake up saying we have to have X in a sector or subsector. And so to us, what makes most sense in this kind of world that we're in, post-COVID, inflation still somewhat higher than target. And, of course, we're kind of edging our way into a potential recession. We're really looking for companies that can manage through these scenarios.

And the characteristics we're looking for include pricing power and the ability to manage expenses. So really the ability to pull levers to manage top line and bottom line. And then of course, as we're heading into this economy where rates will likely stay higher for longer.

We're less keen on companies that have to go out to the capital markets to raise capital, whether it's debt or an equity. And I think companies that can check off these boxes can certainly, in our opinion, weather the storm that we're seeking to materialize over the next 12 months or so.

AKIKO FUJITA: Amy Kong, Sy CI Barrett Private Wealth Chief Investment Officer. Appreciate you stopping by today.