The Fed’s rate hike ‘should be 100’ basis points, strategist says

Victoria Greene, Founding Partner and CIO at G Squared Private Wealth, joins Yahoo Finance Live to discuss the upcoming Fed policy decision and why the economy can handle a more aggressive Fed.

Video transcript

AKIKO FUJITA: Let's bring in our guest for the hour, Victoria Greene, founding partner and CIO at G Squared Private Wealth. And Victoria, Brian walking us through the expectations today. But you've got a pretty bold call. You're expecting 100 basis points hike.

VICTORIA GREENE: Well, it may end up 75, but I'm in the 20% camp. It should be 100 bips. Look, the economy can absorb it. And I actually think that's almost a reaffirmation of how strong we are economically speaking, even if we are in a technical recession, or now we're arguing over what the definition of a recession is.

But look, the labor market is strong. Inflation is still hot. Did it maybe peak in June with the commodities rolling over? Yes, but it's still very, very plateaued. And so I think the Fed, in my opinion, they should go 100. We've always been pretty lockstep with Bank of Canada. They went 100, and I really think it gives them more wiggle room in the fall.

Now you have this pause, nothing happening in August, and then we'll see in September, you know, right now, it's supposed to be 50, 25, 25. Obviously, that could change, and we could see them be a little more hawkish. They could use QT, run off the balance sheet. They have a lot of tools. But I think this is their one chance to get in front of it. And they've been late so long.

So we'll just have to see. I think a lot's going to be happening in the press conference. Like you said, the verbiage is kind of like reading a text message or an email. A lot of times, the verbiage comes out a little more hawkish post-meeting. But it's really the commentary. And we'll see if he walks it back. But come on, I'm hoping-- I'm rooting for 100 today.

BRIAN CHEUNG: Well, Victoria, we'll see about that. I mean, I want to ask you. I mean, regardless of what the size is today, we know that further interest rate hikes are going to be needed. And the Fed's own messaging in the last meeting was that they could take it as high as 3.8%.

That's, again, perhaps about 1.4% away from where we would be if they do 75 today before they then start cutting interest rates again. So do you have an estimate of how many more rate hikes in total might be needed through the end of this year, through the beginning of next year to handle inflation?

VICTORIA GREENE: Not to sound like a Fed person myself, but it's data dependent. I really do think it's going to be what happens with inflation, and do we see any pressure on the labor market, because I think they hike until something breaks. And something's going to break either in the labor market, the inflationary stratus, or liquidity dries up, and that pauses the Fed.

So something breaks other than the stock market because the Fed doesn't really care about the stock market. Short of a massive meltdown like 2020 when there were concerns about the stability of the system, the Fed doesn't care if Apple or Amazon lose money. And quite frankly, we've seen resilient earnings.

So right now, it's green light, hawkish Fed. We are still in the camp of don't fight the Fed. We'll see what comes in the rest of earnings seasons, but the Fed has to be more focused on the economic implications of people starting to slow hiring or even lay off. You've seen a lot more layoffs happening in the tech sector. You have Tesla. You have Shop. You have Twitter. People are actively reducing their labor force. We haven't really necessarily seen that trickle down into the numbers.

And so you're seeing all of these conflicting signs. And I do think the Fed is in a hard part because if you look at even what the companies are saying. On one hand, you have Amex saying everybody's traveling and spending money. The consumer is fine.

And then you have Visa, AT&T, and Walmart saying, oh, my gosh, the consumer is changing their habits, so they're not spending enough money anymore. And so you have these conflicting reports coming from earnings. So what is the true underlying health of the consumer? I think we're going to find that out over the next 90 days.

AKIKO FUJITA: Yeah, that mixed picture we're seeing in earnings, you could argue we're also seeing in some of the economic data. But you point out, we are in the heart of earnings right now. And I wonder, when you look at how things have been moving, the NASDAQ today up on the back of Microsoft and Alphabet's numbers. What's the bigger driver? Is it about the Fed, or is it about earnings?

VICTORIA GREENE: I do think we got so pessimistic that not a dumpster fire was rewarded. So if you look at Microsoft and Alphabet, they really weren't great earnings, quite frankly. Under the hood, the numbers were in-line or some misses. They warned about the dollar impact. But both of them had decent forward guidance. So I think the market right now is very focused not on what you did for Q2. Expectation was that Q2 wasn't that great.

But because there was strong forward guidance, you're seeing those stocks pop on really what traditionally would not have been a nice pop day if you look at just the numbers and the comps between. It wasn't a solid beat for either. So it's very curious reactions right now. Or look at Shopify. I know they got hit pretty hard before the earnings with the layoff announcement and had a pretty strong drop yesterday.

But they missed pretty solidly, and they're talking about this year as a transition year. And now they're up. And so you look, and you're seeing some very curious moves and reactions to earnings. And I feel like the ones that are getting punished are oonly the ones that have bad forward guidance. Like, this quarter is seen as just so forgivable. Like, that's OK. Everybody had trouble in Q2. It's fine you didn't make enough money. Like, we expect you to make more in the second half.

BRIAN CHEUNG: So, Victoria, on that point then, what is the allocation strategy? Are you going to make some moves after 4:00 PM today because of the fact that you're going to get the Fed decision, in addition to more big tech earnings? Because it's not usually the case you see these big market cap stocks moving as volatile as they are right now. Do you ride that out, or are you ready to make some changes?

VICTORIA GREENE: I am. I've been fairly bearish. We actually consider this still a bear market rally. But it's certainly being tested. We've seen kind of a month long bottoming process here. And so I am prepared to move a little bit more aggressive if we have good news this week, and we see this as kind of a signal that the bottom is in. And I know I'm waiting. Most of our investors that are private clients prefer us to be a little bit late than early and get caught out being too aggressive.

So we are being cautious here. I still think there is potential this is still a bear market rally, and it could flip around. I am willing to update my thesis on data. If the Fed only goes 75, they signal this very slow path, and if they-- and what their terminal rate is, and we see inflation come down, and we see the next couple of big ones with-- you got your, what, Meta, Amazon, Apple, you know-- and we suddenly see that the market is forgiving, then you should be reallocating some of the stocks.

That's the million dollar question-- is the bottom in? Was the bottom June 6 to 17? And right now, you want to go then and switch from defensive to high beta. I think it's a little early. I think the next 48 hours are going to determine the trajectory of the summer markets.

AKIKO FUJITA: As always, some good takeaways there. Victoria, good to have you on. Victoria Greene, founding partner and CIO at G Squared Private Wealth.