JoAnne Feeney, Partner and Portfolio Manager at Advisors Capital Management, and Kathy Jones, Charles Schwab Chief Fixed Income Strategist, sit down with Yahoo Finance to discuss the Fed's trajectory for future interest rate hikes, labor market data, and recession risks.

Video Transcript

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DAVID BRIGGS: Time for the weekend-- almost. There's your closing bell on Wall Street. Let's check out how those markets finished up. And look at the Dow, finishing up 33 points. The S&P 500 down just slightly, basically even, as is the NASDAQ for the day. All of it reacting to that hotter-than-expected jobs report once again.

Let's break it down with JoAnne Feeney, Partner and Portfolio Manager at Advisors Capital Management, and Kathy Jones, Charles Schwab Chief Fixed Income Strategist. Nice to see you both. And let's go ahead and start with you, Kathy. Your reaction to the market's reaction to that jobs report that just won't cool down?

KATHY JONES: Yeah, it's very interesting because early in the day, it looked like the market was going to react adversely to it on the idea that maybe the Fed has to raise rates more than expected because the job market is continuing to be pretty firm, and wages were up a bit more than expected. But now we've kind of come all the way back.

And I think that the assessment is probably that this doesn't change the trajectory. We know that the Fed is still on track to raise rates a bit more, but this is maybe not bad enough to change the terminal rate or the peak in the Fed funds rate or make them more aggressive going forward. So here we are sort of back to where we were yesterday, waiting for the jobs report that wasn't a big decisive factor.

SEANA SMITH: What do you think, JoAnne? Do you agree just in terms of the fact that the Fed won't change its course or, really more so, be more aggressive and have a 75 basis point hike back on the table this month?

JOANNE FEENEY: Yeah, the Fed's pretty clear that they're paying a lot of attention to this data. I think the really surprising thing this morning was the increase in wages. That came in higher-than-expected. We have an issue in this economy that we have a labor shortage, so it's making it really hard for the Fed to get the wage side of the inflation equation under control.

And so the data that came out today just confirmed that there's a shortage out there. Firms are still hiring, and wage pressure is still out there. They do see, though, some reasons for inflation to cool down. It looks like we have hit peak inflation. And they've made it clear that they're going to continue to raise rates.

I don't think we're going to see 75 basis points this month. And they're going to do smaller rate increases. They made that very clear. But they're going to continue to do them, and then probably hold for a while once they reach a rate they think is sufficiently contractionary. And we're seeing that in the real interest rate, that that's moved enormously this year. And that really does constrain financial activity.

DAVID BRIGGS: But, Kathy, doesn't this labor market, doesn't that wage growth, 5.1%, mean that Jerome Powell has more work to do?

KATHY JONES: Yeah, I think the Fed's been very clear on what the plan is, so hike enough to be in restrictive territory to slow the economy. That's probably 5% or so on the Fed funds rate, seems reasonable to us. Hold for a while to assess what happens to see the lag impact of all the tightening that's taken place to date. And then adjust when the time comes when the data tells them to.

So I wouldn't make too much out of just one month's wage data. It was above expectations. We've been waiting for it to roll over. I think the Fed would be a lot happier with 2 and 1/2% to 3% wage growth.

But keep in mind that there's a lot of technical factors in there. We had a big boost in a couple of categories that tend to be higher paid. We're getting into severance payments for tech workers that may have affected the numbers.

The overall picture on wages is that they're rolling over. And the overall picture for the consumer is that a lot of the fiscal stimulus has worked its way out. And the overall story is the Fed's done a whole lot of tightening over the past 8 to 10 months. That's probably just now beginning to work its way into the system. So I would argue that the trend in inflation next year will continue to be lower and that the wage growth will slow down as well.

SEANA SMITH: JoAnne, where do you see interest on the risk of a recession? If you think we're going to see one, is this something we should be worrying about for the first half of next year or more likely to happen in the second half?

JOANNE FEENEY: Well, the risk of recession clearly has gone up. But the thing that makes it potentially hard to forecast in this kind of a rising rate environment is that we do have this labor shortage. And we're seeing, in fact, firms hoard labor. We're not seeing the level of layoffs and quits that we've typically seen historically.

And so that suggests that a classic recession, where you have a big spike in unemployment, is less likely than a mild recession, where you see more of a sharp decline in job openings, wage growth coming back down to a normal level, and certainly softening in consumer spending. We're already seeing saving rates decline. We're seeing households dip into their past savings.

But you know-- so we're looking at next year as more of a potential mild recession, unemployment going up, job openings really coming off the boil, and the slower consumer spending. And that's, I think, a decent way to think about how to invest. But one positive is that the rate increases that are behind us are much bigger than the rate increases ahead of us. And so those headwinds for growthier stocks are likely to peter out and eventually reverse into tailwinds. And so that does set up not a terrible investing environment going forward if you can look out two or three years for the ultimate payoff.

DAVID BRIGGS: And, Kathy, given that setup, what's your advice to investors?

KATHY JONES: Well, you know, I focus on the fixed income markets. And we've been saying for quite some time that investors should be taking advantage of these yields by extending duration in high-quality bonds. I don't think we're in a new world of high inflation that's going to continue to accelerate for a long period of time.

And real rates are high. And so that's the time when you want to start extending duration, moving into intermediate and longer-term bonds to capture that income that's available now. And we've had a huge increase in rates since the beginning of the year.

Income from bonds right now, investment-grade corporate bonds after-tax adjustment for municipal bonds, even treasuries, 4% or 5% plus with very low risk, not that much duration risk makes a lot more sense to us than taking risk in some of the other parts of the market. So that's a viable alternative to, say, dividend-paying stocks and other assets that are still going to be much more sensitive to the cyclical environment and the economy. So we're definitely in favor of high credit quality, intermediate to longer-term duration bonds for investors to balance out their portfolios.

SEANA SMITH: All right, Kathy Jones and JoAnne Feeney, thanks so much for joining us this afternoon. Have a good weekend.