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Inflation: U.S. consumer in 'great shape' but 'terrible mood,' strategist says

BlackRock Global Fixed Income Chief Investment Officer Rick Rieder joins Yahoo Finance Live to discuss the state of the economy, inflation, the Fed's decision for a 75 basis point rate hike, and the outlook for cryptocurrency.

Video transcript

BRAD SMITH: And yesterday's decision by the Fed to raise rates by 75 basis points will have long-lasting impacts on the nation's economy. And our next guest even compares it to a car, saying before going into drive or into reverse, you have to put the car into neutral. Joining us now to break down the Fed is Rick Rieder, who is the BlackRock global fixed income chief investment officer. OK, Rick just break down the analogy for us and where the Fed is in that process.

RICK RIEDER: [CLEARS THROAT] Sure. I mean, listen, I mean, the Fed-- by the way, I thought the Fed did a great job yesterday. There's something really critical. I mean, in the last year, I think the Fed has been clear about this. Last year, too slow to move. You need to get to neutral.

You can't react, particularly in a slowing economy. It's pretty rare in our careers to see the Fed tightening when the economy's slowing.

[CLEARS THROAT]

But what the Fed has to do is they have to get to neutral. When you get to neutral, if you need to tighten more because inflation is higher, you could do that. Or if the economy is slowing too fast, we're going into a deep recession, then you can pivot and stop tightening or actually start easing. So getting to neutral, similar to the metaphor of driving a car, you've got to get to neutral before you go in either direction.

And I think the Fed is right. By the way, we're still at easy. If you think about where monetary conditions are today? We're still at easy conditions. By the end of the year, we start to get to neutral. Fed's got to get there quicker. And I thought Jay Powell was incredibly good yesterday describing-- listen, it may cost the economy some momentum. But we need to get there. And we certainly need to get off of easy conditions. And they're far from it.

So I think moving aggressively and then saying, gosh, we may move 50 next time-- and by the way, they could move more. But I think you need to get-- you need to show the world-- and it's better for the economy longer-term, and it's better for the markets longer-term if you get there quicker. And then you can adjust and be flexible.

JULIE HYMAN: Hey, Rick. It's Julie here. It sounds like you have faith in the Fed despite perhaps them being late to try to catch up and get to neutral. And there have been a lot of questions sort of about the credibility of the Fed in the past week, especially with the sort of late-- what looked like a leak on the 75 basis points. How were you feeling ahead of the meeting? And were you further reassured by the press conference?

RICK RIEDER: So Julie, listen, I think the Fed-- and I've been maybe been too critical. I thought last year, I didn't really understand why they were waiting so long. By the way, to go to the same silly metaphor, when you're driving a car, you don't want to put the emergency brake on, meaning you want to gradually do it.

[CLEARS THROAT]

You want it tap on the brakes. And I think they were too slow in doing that. But now they're moving. And I think they're doing the right thing. You got to move. And you got to get to neutral. And as long as you communicate that we're going to get to neutral-- but gosh, we're--

And there was a question yesterday in the press conference. You're looking at the consumer data, consumer spending data. And the Fed's watching it. Are you watching the employment data? They're watching it.

Listen, if the economy goes too deep into a recession or we start increasing unemployment too high, then they're going to adjust. But listen, I think they waited too long. And we've been critical of that. But now I think they're getting ahead of the curve.

By the way, the markets today-- the Swiss National Bank was a pretty surprising aggressive hawk. And that's really impacted it. It would be interesting see what the markets-- how they would have reacted if you didn't get that today.

JULIE HYMAN: And so where are you in the recession camp here? Because Powell was very careful yesterday to say, we are not trying to bring about a recession. Of course, it's hard to envision a world in which he would have said, we're trying to bring about a recession. But effectively, if he's also signaling that they're going to be aggressive here, that that's the outcome.

RICK RIEDER: Mm-hmm. So listen, I mean, have you ever had a situation where you could avoid a recession, today's the day. I mean, inflation is extremely high.

[CLEARS THROAT]

But you think about where the consumer is delevered. Businesses have termed out their debt. They've delevered. The debt in the system is actually sitting on the Fed's balance sheet, which is the most stable place for it to be. So you don't have a structural problem like you've had in the past.

The consumer is in great shape. They're in a terrible mood because gas prices are up and food prices are up. And the net disposable income is changing significantly. But you can engineer a soft landing. I mean, you can do it because the system is in pretty good-- the place we're starting from--

Business investment is extremely high. The place you're starting from is-- you've got some room. And I think that Jared talked about that yesterday. You've got some room.

Are we going to see-- I don't think we're going to see a recession this year. I think you're going to see one next year. But are you going to press? And by the way, I've heard different comments on this. Much of what's driving inflation higher is the supply side.

We've taken 8 million barrels of oil off the market through Russia. The food price dynamic is largely because of the Ukrainian war as well. So it's a question of how much demand are you going to try and cut to bring down what is largely a supply issue. I don't know how people say it's a demand issue when you take--

I mean, it's clear when you run the inflows and outflows that it's mostly supply. The question is, how much demand do you want to cut? How many jobs do you want to cut? I mean, you could cut millions of jobs, which we would argue is the wrong decision, ultimately. I just think, get to neutral, and then see where we are.

BRIAN SOZZI: Rick, we've asked you in the past about crypto markets. Are you surprised to see how crypto markets have reacted this week? And how do you think that landscape is going to react into what appears to be much more aggressive Fed tightening?

RICK RIEDER: Yeah, it's a great question. I think people underestimate, when you leave rates at such low levels for such an extensive period of time-- we've seen this every time that the central bank keeps policy-- I mean, you can go back to '08. You can certainly go back to '15 and '16. When you keep policy too easy, the leverage builds in the system slash how do I capture return quickly. And you're seeing a lot of the leverage that was built up around crypto come unglued pretty darn quickly.

So listen, I still think Bitcoin and crypto are durable assets. It's a durable business. But I think there was so much excess built around it-- and gosh, this is my way to generate return when interest rates are so low, that I think you've got to see that.

And by the way, it's not terribly dissimilar from the internet bubble when you had-- if you go back to '99 and 2000, was the internet a bad idea? No, it wasn't a bad idea. But you created so much excess around it. And you just have to de-gear that dynamic. And I think we're seeing that today.

How far that goes-- when things get a sense of momentum, people don't like losing money. And markets go down five times faster than they go up. And so that's why you're seeing this incredible unwind.

So I still think it's durable. I still think it's going to go on. But I think there's a healthy recalibration going on. It's a question of how much that recalibration is going to go.

BRAD SMITH: In that recalibration, what then gets set as a fair price for some of the crypto assets when you have kind of a flight towards a quality or something that's annexed to a viable blockchain?

RICK RIEDER: So maybe because I've been doing it a long time, I can usually figure out free cash flow and figure out what an asset-- what a piece of real estate is worth, what a piece of equity is worth, what a piece of debt is worth. It's pretty hard when there's no true intrinsic value. So what is it worth? It's worth what the next person will pay.

My sense is, in all these situations, you overshoot. And my guess is you've probably got some downside to go from here. But it's hard to say what fair value is. My sense is, like a lot of assets today, if you look two to three years hence, they'll be higher than they are today. But could you overshoot on the downside?

This one's just hard to figure out, like gold. Because I can't figure out my free cash flow multiple. I can't figure out what my security is underneath it. That's a tough question.

JULIE HYMAN: So Rick, let's come way back into your wheelhouse then and talk about treasuries for just a second because are we going to see any abatement of the selling that we have seen in treasuries? We saw a little bit of it yesterday, actually. But in terms of the coordinated drop that we've seen in stocks and bonds this year, we had been getting commentary recently from some of the folks we've been talking to that that might reverse itself. What do you see happening?

RICK RIEDER: Do I have to say yesterday was one of the most incredible days I've seen in the markets? The buying that we saw in treasuries--

[CLEARS THROAT]

By the way, I think there was a tremendous amount of short covering. But the buying we saw was incredible. It's like the Fed just eased. I didn't really understand what the market was doing. I mean, the front end of the curve moved 25 basis points lower in yield yesterday. How does that happen? I mean, it was bizarre. It was almost as if the chair didn't go 75.

Listen, I think the front end of the curve has probably got some upward adjustment to do. Listen, I think rates can go a bit higher. We've said for a long time, when you get the 10-year to 3 and 1/2, 3 and 1/4, 3 and 1/2, I don't think we're going much further than that.

So how do we get to that number? So let's say you think 10-year inflation, the markets are pricing that at about 2 and 5/8, 2 and 1/2 percent, 2 and 5/8 percent. Five years is about 3%. So say, OK, what should the real rate be on top of that?

I would argue if you get to 50 to 100 basis points positive-- now, again, we are running massively negative real rate. So let's say long-term inflation is 2 and 1/2 to 3%, you put 50 to 100 basis points of real rate. It gets you in and around this 3 and 1/2 10-year. Can we overshoot a bit more than that?

But listen, I think 90% to 95% of the rate move has happened, particularly out the curve, longer on the yield curve. Can the front end, if the Fed feels like, gosh, this inflation's stickier, nominal CPI is stickier because of food and energy, we've got to go deeper, could the front end back up another 50 basis points? Yeah, I could see that. But I think we're getting-- like I say, I think most of that move out the yield curve has happened.

BRIAN SOZZI: Always great to get some time with you, especially after the Fed meeting. Rick Rieder, BlackRock global fixed income chief investment officer. Always good to see you. We'll talk to you soon.