T. Rowe Price Capital Market Strategist Tim Murray joins Yahoo Finance Live to discuss Fed policy, inflation, recessionary risks, supply chain issues, and the labor market.

Video Transcript

BRAD SMITH: Welcome back, everyone. Record high inflation continues to weigh on the markets, as well as the consumer, as the Fed took more steps this month to rein in the economy. Now Fed Chair Jerome Powell spoke on the issue last night, reaffirming this is a top priority for the Federal Reserve. Take a listen.

JAY POWELL: We know how people are suffering from high inflation, and we have both the tools and the resolve to get inflation back down. And no one should doubt our resolve in doing that. And I think if you look at how quickly we've moved in the last few months, really, then you'll see that financial conditions have tightened quite a bit. What we need to see is inflation coming down in a clear and convincing way. And we're going to keep pushing until we see that.

BRAD SMITH: Our next guest says that the Fed is the top driver of the markets right now. Tim Murray, T. Rowe Price capital market strategist in the multi-asset division, joins us now. And let's just dive right into it. I want to get your reaction to what Fed Chair Jerome Powell had to say and how much, of course, we're watching the markets react on that this morning, too.

TIM MURRAY: So, first of all, thank you for having me. Good morning. So to respond to your question, I think the Fed is going to be, like I said, the main driver of what happens from here in markets. And what Chairman Powell said today is-- or yesterday-- is more of the same of what he's been saying. The dynamic of the Fed has changed so much over what we were used to for the past 15 years. That's really the key here. The past 15 years, they had their dual mandates not at odds with each other at all, right?

So one mandate is keep the economy strong. The other is keep inflation low. Past 15 years, they could do however much stimulus they wanted. And it didn't have an impact on inflation. Now inflation, the genie is out of the bottle on inflation. So, as a result, they have to choose. They have to prioritize. And they're clearly prioritizing inflation. That's what he reiterated. He's been reiterating that for the last six months.

And it's the right move. Certainly, inflation has-- we have to get inflation under control. It's really crucial to economic growth going forward. So, basically, what Powell is telling you, believe me, there's no Fed put. I'm not going to relent on this until inflation is back in the bottle.

JULIE HYMAN: So, Tim, if the Fed is the most important thing for the market here, where is the suspense? In other words, we know that the Fed, the Fed has signaled it is going to be raising by 50 basis points at the next meeting, perhaps the meeting after that. So where is the question for you now in terms of what you want to know from the Fed and how that's going to inform your investment decisions? Because it doesn't seem like anything is going to change certainly in the short-term.

TIM MURRAY: Yes, so he said-- one of the points that he made that was in the clip that you played was, they need to see clear evidence that inflation is coming down. And that's really the question. What, to them, is clear evidence? Is it that we start to see CPI come down? That's probably not. They probably need a lot more than that. Is it that they need to see unemployment starting to go up a little bit? Is it that-- are there other issues that they're paying attention to?

It would be really great to know what data is going to convince them that, OK, the inflation genie is back in the bottle, because when that happens, now we can switch back to worrying about the economy. And that's when they start prioritizing the economy, and we can start saying, OK, recession risks will go down from here.

BRIAN SOZZI: Tim, I've spent the past 24 hours talking to execs at Walmart and Target. It's, just talking to these folks, it sounds like they have been hit with a dirty sock filled with ice cubes. And they've just been really hurt, to a large degree, by surprising inflation. Now, if Jerome Powell is going to get all his credit for saving the economy at the height of the pandemic, doesn't he deserve to be knocked here for potentially putting this economy at risk of a major recession?

TIM MURRAY: Yeah, I mean, I don't know that I would say you need to knock him for putting the economy at risk for a recession. Certainly-- and they've admitted this, that they probably moved too slowly as far as raising rates. But at this point, it's the choice that they have to make. I mean, if you think about it, the dynamic is really interesting here because what has happened is we've had these supply shocks. So what that means, if you go back to economics 101, and think about it this way, we had supply up here, it came down to here.

So now demand has to either come down to there, or supply needs to bounce back up. They can't really control supply. That is about COVID. That is about Putin. That is about the labor supply coming back, labor force participation coming back. What they can do is impact demand. And Powell said this as much in his last press conference. Their tools impact demand. So what they're going to do is, they're going to bring demand down. And the hope is that supply comes back quickly enough that that decrease in demand isn't a recessionary decrease in demand. So that's what you need to watch for from here.

JULIE HYMAN: So, Tim, put it all together for us in terms of how it's informing your strategy. So you look at strategy across assets. What's your best idea right now, given this backdrop?

TIM MURRAY: Yeah, so I would say the best idea is to make sure you have an allocation in place to long US treasuries. So, obviously, they've-- that's not been a great asset class to be in year to date. But what I would say is that, as we shift-- so far, the sell-off that we've seen in the market-- it has been both fixed income and equities-- the sell-off hasn't been about rising rates. It's been about the market recognizing how serious the Fed is about increasing rates. And as a result, we've seen rates really skyrocket.

That said, I think we're at the point where now you have to start-- the rates part of the sell-off is done. The next shoe to drop would be recession. As the market-- the market hasn't priced in a recession yet. But as the market starts to think, yeah, maybe we are going into recession, that's when you'll start to see the sell-off change-- excuse me-- change form.

And as a result, you'll start to see bonds start to add ballast to your portfolio. Thus far, bonds have not helped you at all. But as we start to price in recession, that could push rates back down, and that's good for long US treasuries. It's good for the fixed income portion of your portfolio, less so on the credit side, much more so on the investment grade and long duration side.