The Fed ‘is gearing up for a soft landing’: ConnectOne Bank CEO

ConnectOne Bank CEO Frank Sorrentino sits down with Yahoo Finance Live to talk about the Fed's interest rate cycle hike, market outlooks during recoveries, recession indicators, and how businesses are prioritizing quality labor amid workforce crunches.

Video Transcript

RACHELLE AKUFFO: Welcome back to Yahoo Finance Live, everyone. Lots of volatility as markets wait to hear from the Fed as it kicks off its two-day meeting today. Well, let's bring in Frank Sorrentino there, the CEO of ConnectOne Bank, for more on what's been happening.

So, Frank, we did believe that the markets had priced in this 50-basis point hike coming this week. But after such a late start in battling inflation, coupled with some of this economic data we're getting, how aggressive does the Fed have to be right now?

FRANK SORRENTINO: Well, I think the markets actually priced in more than just the rate increase that they made and the one that they're anticipated making. I think the market's pretty much priced in all of the Fed increases that are going to occur over the next year or so. You've got the two-year's trading the mid-twos already. So I think the market, as the market always does, is getting it right.

RACHELLE AKUFFO: Now, given the unprecedented nature of this recession-- obviously, no one saw COVID coming, and then you also didn't see the Russia-Ukraine invasion coming-- how might the recovery and the strategies needed to support the economy be different this time versus other recessions that we've witnessed?

FRANK SORRENTINO: The big thing that I see that makes it difficult to really look back in history and try to find an answer for how this recovery will go is the enormous amount of liquidity that's in the marketplace today. The Fed pumped the economy with over $4 trillion of additional stimulus in 2020, and a lot of that is still floating around in the economy. We see that today in people's personal savings accounts, we see it in business coffers.

And so we see a lot of cash on the sidelines moving its way into the economy. We've seen a lot of assets being priced at, I would say, exorbitant levels. And so how all of that liquidity is either removed from the economy or how it makes its way through the economy is something that I don't think anyone can say with certainty that they know what is going to happen.

We know what happens when we raise interest rates. We don't know what happens when you take $4 trillion out of the economy if they decide to take that much away.

RACHELLE AKUFFO: And have we gotten an indication, perhaps, of how aggressive they might be with this monetary policy tightening and how we might see that play out? Because, obviously, the Fed very focused on inflation and also the job market-- don't seem to be as worried about things like the equity markets.

FRANK SORRENTINO: Yeah, you know, I think the-- I don't see it all just in the equity markets. There's many other assets that have been priced up to unrealistic levels. But certainly, interest rates are the easiest way to slow down the economy. But when we look at things like unemployment, it's at near historic lows and potentially will go even lower.

So interest rates, even if the Fed moved fairly aggressively through this year and got us to what they believe is the neutral point, those would still be historically very low interest rates if you were to look back over the last 20 years or 25 years. So I think the Fed has a real challenge on its hand.

I think they are gearing up for a soft landing. I think we're seeing that with our clients and how they're reacting to what's going on in the marketplace. People are still reporting that things are quite robust. Home sales are up. Apartment rentals are tough to find. Materials are tough to find.

Folks that are clients of ConnectOne Bank are seeing a fairly strong economy even at this point in the cycle. And I don't see too much that's standing in the way. I know there's two tales here of whether we're headed into a recession or not. But I see the Fed managing some level of soft landing.

RACHELLE AKUFFO: And as you mentioned there I mean, obviously, you have an inverted yield curve pointing towards a recession, but then you have some strength that we're seeing in the economic fundamentals. But then you also saw this 1.4% GDP growth coming in surprising. So where do you look, then, for clear signals about whether there will be a recession and how soon it might come?

FRANK SORRENTINO: Look, we like to speak to our clients. They are mostly small and-- small and medium-sized businesses that bank with us at ConnectOne. They're located on Main Street. And I like to talk to them. I like to understand what's happening.

We're definitely seeing issues with supply and demand. It's difficult to get materials. It's difficult to get any sort of electronics. I think part of the GDP reduction was because of the fact that we had to buy a lot of goods and services from abroad because we just can't produce it fast enough here.

So I think there are things that, really, we have to peel the onion back and truly understand what's happening in order to fully bake in what our expectation is for the future. I think the economy for the last two or three years here has been a solid green light. It was put your foot on the gas, go. I think we've got a flashing yellow now, which doesn't mean to stop, it just means slow down, take a look before you step on the gas again. And I think that's what our clients on Main Street are telling us.

RACHELLE AKUFFO: So for some of these small businesses, then, what are their top priorities as they look ahead to the rest of the year? And what are their biggest concerns?

FRANK SORRENTINO: Their biggest concern-- the ones that are communicating with us about what are issues, finding good, quality labor is probably job number one. The labor market is so tight right now, and that's one of the reasons why I lean more or less towards a recession. There just aren't enough people to fill all the jobs that are required from now to as far into the future as we can see and as far into the future as the clients of ConnectOne can see.

So that's number one. Number two is, I think, really understanding this neutral point in interest rates. I think people are accustomed to very low, zero to very low, interest rates. And going from very low interest rates to just low interest rates is concerning to a lot of folks. That concern is not so much.

And then third is, of course, the supply imbalance-- the ability to get the supplies that you need in order to run your business, whether it's the raw material or whatever it is you need, especially ConnectOne does a lot of construction lending, building supplies-- you know, that's one of the biggest contributors to the economy is the building sector-- very hard to get supplies and labor. So I think those are probably the three most important things that people are focused on.

RACHELLE AKUFFO: So just quickly as we're running out of time-- about 30 seconds-- if you had to give two tips for companies in terms of the best way to assess the health of their business so that they can try and move forward in this climate, what would that be?

FRANK SORRENTINO: I would say keep an eye on your liquidity. Make sure you have dry powder for the future. Do not overextend yourself here. This is not a place to get overextended in this economy.

Keep an eye on your business. Don't let all the noise that's going on around you affect what decisions you make. There are some really great businesses out there that are doing quite well and will continue to do quite well, notwithstanding what happens to interest rates or any of these other things that we're discussing.

RACHELLE AKUFFO: All right, we do appreciate you joining us today. Frank Sorrentino there, the CEO of ConnectOne Bank. Thank you so much.

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