Zach Griffiths, senior macro strategist at Wells Fargo, and Jeanette Garretty, chief economist at Robertson Stephens Wealth Management, discuss the Fed's rate hike and what it means for the economy going forward.

Video Transcript

- For more on the Fed's decision, let's bring in Jeanette Garretty, Roberts Stephens Wealth Management Chief Economist, and Zach Griffiths, Wells Fargo Senior Macro Strategist. Nice to have you both on. Jeanette, we'll let you lead off here and your reaction to 75 basis points. Are you surprised?

JEANETTE GARRETTY: No. I think at this point, this 75 is not a surprise. I'm glad you didn't ask me that a week and a half ago. So everything changed so much. A little bit surprised that the qualitative commentary did not change in certain ways and a little bit about the economic projections. But I'll let Zach talk about something, too.

- Well, Zach, first just give us your reaction to what we heard from the Fed, largely expected. But what does this mean for the economic backdrop, market reaction here going forward?

ZACH GRIFFITHS: I'd say the market reaction so far has been somewhat muted, as I think 75 basis points was widely expected after that news report earlier this week seemed to indicate that's where the Fed's preference was. And it makes sense when you think about just how hot inflation came in. They said they're going to be data dependent. And they have an inflation situation that's not improving. It's only getting worse. So for them to change their view and their action to 75 basis points from 50 basis points is a big move in a short time. But it makes sense to us given the current economic backdrop.

- And, Jeanette, some people were worried that by reacting this way that the Fed might appear to look panicked rather than sort of trying to stay ahead with the news that we see with inflation coming out and disappointing CPI data. What do you think this does for the Fed's credibility by going for this 75-basis-point hike?

JEANETTE GARRETTY: Well, I think-- I think what they're attempting is to-- I don't want to say re-establish credibility. I would put it this way. Historically, the Fed likes to be in charge of where the credit markets are going and be sort of ahead. They haven't been ahead. They know that that's a problem. So they think this is an attempt to re-establish their lead on where rates are going to head. And this-- this probably will be effective in doing that.

I haven't heard any commentary and don't want to look away to see what the dot plot is doing to see how that may have shifted. I suspect that that is showing an intention to do a greater level of aggressiveness. And I think the credit markets will pick up on that.

- Zach, what do you expect to hear from Jerome Powell regarding whether we can get out of this without avoiding a recession? At the last meeting room, he was very careful to couch it as a softish landing that he was projecting.

ZACH GRIFFITHS: Yeah, the soft landing is certainly the holy grail for a central bank policymaker but very difficult to achieve. And so what we'll really be focused on is whether or not he thinks 75 basis points is the new standard pace for one more hike, two more hikes, three more hikes. And so that impression of whether or not they've level shifted just higher how much they think they're going to have to go incrementally at each meeting is going to be big as far as how the market reacts.

But clearly, we see they expect to take the policy rate higher. And that's consistent with an economic backdrop that has inflation running at such a hot level and really not improving at this stage. So we're really going to be focused on, what is the pace of these increases? We can see they've taken the dot plot up considerably. I'd say they've taken it up a bit less than we've expected. So the message has been balanced so far. It'll be interesting to see how Chairman Powell leans with his press conference.

- Jeannette, where do you peg the probability of a recession at this point?

JEANETTE GARRETTY: I call it 50-50. I know there are people that are calling it more. I look at I don't-- I don't know if this is a correct construct in the first place, meaning if you avoid a recession because economic growth is 0.5 versus negative 1, it's all going to feel kind of the same.

I think the question is, what is going to happen to various sectors? We're already seeing the housing market respond very, very quickly to what's happening with rates. It's an eye-opener to see the national 30-year mortgage rate get above 6 in a very short period of time. That will have an impact. Retail sales today kind of shows that consumers are beginning to respond.

I want to call everybody's attention to something that Chairman Powell looks at. He has said that he looks a lot at the Atlanta Fed GDPNow figure, which is a real-time measure of economic activity. They came out this morning as soon as retail sales number came out. And they said GDP growth in the second quarter is 0. So this is going to get real interesting.

- In fact, to that point, then, if that's what the Atlanta Fed is predicting for the second quarter of 2022, how should people be positioning themselves when they couple that with now what we've seen from the Fed with this-- with this rate hike?

ZACH GRIFFITHS: I think it comes down to a flatter curve. And it's already very flat now. We think it'll continue to flatten because the Fed really isn't in a position to respond to slower growth if inflation doesn't come back down. And it's a similar situation when you think about-- people ask the question all the time. How much pain in the equity markets can the Fed tolerate?

At this point, it almost needs pain in the equity markets to accomplish its goal of bringing down inflation. So when I think about a weakening economic growth picture while the near-term outlook for the policy rate is it needs to go higher, that's a flatter curve. And we think the curve can be inverted by as much as 25 basis points by year end.

- Jeanette, do you expect to hear a new norm when it comes to inflation? We heard a lot about, again, that projected 2% that the Fed wants to see. But do you expect just a new norm in where we are closer to 3, maybe north?

JEANETTE GARRETTY: I think what we'll hopefully hear is some reality about what the Fed can do with this inflation rate. I don't know if I want to call this quite the new norm. But there's a lot going on here because of the Ukrainian war, for example. And look in Europe right now. Natural gas prices have spiked because Gazprom has a pipeline issue and so on and so forth. And the Fed can't do anything about this.

So whether that establishes a new near-term norm for where inflation can be, I guess we can call it that. But I think these are very unusual circumstances.

- Indeed they are. Jeanette and Zach, thanks so much. Stick around with us, get your reaction to what the Fed Chair has to say in just a--