Market fears Fed will ‘overcorrect in an effort to regain credibility’: Strategist

EPFR Director of Research Cameron Brandt joins Yahoo Finance Live to discuss recent stock rebounds as U.S. inflation reaches a 39-year high, market volatility, and the outlook for Fed policy.

Video transcript

BRAD SMITH: Everyone, we're taking a quick look at the markets here as major averages have been rebounding throughout the intraday portion of the session. We saw some mixed activity to begin things, and we're continuing to track the major averages with the move higher that we're seeing on the NASDAQ by about 2%, the S&P 500 by about 1.3%, Dow by about 6/10 of a percent.

For more on this, and today's activity, and a reaction to what we just heard from the Minneapolis Federal Reserve Bank President Neel Kashkari, we now have Cameron Brandt, who is the EPFR Director of Research. Cameron, thanks for taking the time here with us on the day. First and foremost, would love to get your reaction to what we just heard from the Minneapolis Fed President.

CAMERON BRANDT: Well, if he's worried about people thinking that he won't follow through, he can rest easy. We're certainly starting to see a reaction in the universe of mutual funds and ETFs, which is the lens that we track things through. In fact, I would say at that moment that the market's main worry is that the Fed, which I think has lost a bit of credibility with its transitory narrative, will, perhaps, overcorrect in an effort to regain a credibility that eroded a bit last year. But there's no doubt based on the flows we're seeing that people are a lot more interested in the Fed's soft power at the moment than Vladimir Putin's exercise in hard power.

AKIKO FUJITA: Cameron, you know, we're talking as we round out what has been a really choppy week in the markets-- we've been talking a lot about the wild swings, and you've highlighted specifically in your note about the retail investors being back in the game. When we look at the moves so far this week, I wonder how much of that you think is coming from the retail side.

CAMERON BRANDT: It's interesting that the retail investors have been poking their nose back into certainly some of the fund groups we track. Usually, volatility tends to chase them out, certainly in the mutual fund universe. But at the moment, it's very much an institutional show, especially true for US and China dedicated fund flows, less so in global equity funds, which have been perhaps the most loved fund groups by retail investors over the past two years. So the reactions we've been seeing, certainly from where we sit, are more in institutional than a retail response.

BRAD SMITH: We were taking a look at some of the year-to-date moves for the major averages there on screen for our viewers a moment ago, and a lot of question mark around where this market will set its bottom, where it will actually find some footing. And what would your expectations be on that front, especially as we continue to hear more about where the Fed will continue to, perhaps, be as transparent and telegraph its policy as best as possible here?

CAMERON BRANDT: I would probably be relatively optimistic about the floor. One thing we have seen in recent weeks is how reluctant certainly mutual fund investors are to abandon exposure to equity markets. And while there are obviously a lot of questions out there, recent earnings from US companies have is certainly indicated that they have some pricing power with which to navigate higher prices.

Whereas on the other side of the coin, even if the Fed were to raise its key rate, say, up to the giddy heights of 2%, with the current inflation reading that would still leave a real interest rate of around minus-3% to 4%.

BRAD SMITH: All right, Cameron Brandt, who is the EPFR Director of Research joining us. Cameron, appreciate the time and insights. We'll have to check back in in the future here.