New York Life Investments Economist and Portfolio Strategist Lauren Goodwin joins Yahoo Finance Live to discuss the expectations for Wednesday’s FOMC meeting, the U.S. inflation rate, market uncertainty, and the outlook for earnings.

Video Transcript

BRAD SMITH: So kicking things off here, when we think about the Fed's policy pathway forward, it seems like there's more inkling on the streets to believe that there's going to be another kind of 25 basis point rate hike that comes even later on with this kind of prolonged simmer, if you will. From your perspective, your vantage point, what might we see play out in their policy pathway? And what might the economy do in reaction in terms of the delayed data that we're going to get, too?

LAUREN GOODWIN: Well, first of all, I think that tomorrow, in the Fed's press conference, we need to expect not only a 75 basis point hike, but also a continued message of hawkishness. As far as the Fed is concerned, they have one job, and it's to bring inflation lower. And with core inflation in the area of 6%, we're just not there.

And so even though we are starting to see really early signs of the economy turning, which is what we would expect about six months after the Fed's first rate hike, I don't expect that that'll be enough to meet the market's rumblings under the surface that we'd be getting a more dovish path here in the next month or two.

JULIE HYMAN: Does that then send the market downward? Because as you say, what you're describing is not really priced in right now. There does still seem to be this hopefulness in the market that the Fed is closer to a pause or a pivot than not.

LAUREN GOODWIN: I think it does send the market lower, again, because the expectation is that we'll get a little bit of rumbling that maybe the Fed would pause sometime soon. The reality is, I do think that they'll pause sometime soon. But a pause, as you said, at the get-go is not the same thing as a pivot. And it's not just where the Fed raises the policy rate, but how long it stays there that matters for the economy and matters for markets.

And so I think the most likely scenario is that, yes, we do get some bolstering of the market when the Fed does ultimately pause. But then a very similar environment to what we've been seeing here in these past couple of months, as the market tries to game, OK, when does this pause actually turn into a pivot. And I think that it might take longer than the market's expecting.

BRIAN SOZZI: At any point next year, let's say in the second half, do you see the Fed cutting rates?

LAUREN GOODWIN: I think it's possible. It's not my base case in the first half of the year. As we move into the second half of the year and we do start to see the prolonged effects of higher interest rates on the economy, I think that we could get there. What will it take for the Fed to start cutting interest rates? I think we need to see core inflation with a 2 handle.

We need to see both core and headline inflation moving lower. I do expect that will be the case in the second half of next year, even in the first half of next year. And we need to see clear evidence that there's no more risk of a wage price spiral in the labor market. And so that suggests some pretty significant economic weakening from here for that to be the case. I think we could see those conditions.

What could get us there just a little bit faster is if financial conditions tighten enough where credit markets become disorderly. We're nowhere near that right now, but I do think that's a wild card that could push the Fed off of the inflation focus it has right now.

BRAD SMITH: Portfolios have moved more defensive. What does a safe asset class look like as prescribed from your perspective right now?

LAUREN GOODWIN: Well, there's one thing that's for sure-- this economic cycle is so different from the last one, the Great Recession, where we had low inflation, low rates, low volatility, frankly, over a 10-year period. Now we have the opposite of that-- high inflation, high volatility, rates moving higher. And so what is safe in that environment is going to look different. In the past, it was growthier strategies, or in moments of volatility, it was core bonds and cash.

When inflation's 8%, that's not a safe asset anymore. That even with higher yields, you're seeing a significant deterioration in purchasing power from taking those strategies. And so investors instead need to be focused on, how do you build resilience against inflation and the volatility that we're seeing in the market?

JULIE HYMAN: And so how do they do that?

LAUREN GOODWIN: Great question. Make me put my money where my mouth is. A couple of ways. I think in the equity sleeve of a portfolio, one of our highest conviction overweights is in value equity. But value, it's not so much about value versus growth, but rather, quality. So we're looking for companies that have low sales variance, high margins, high interest coverage. And that can actually span all sectors. We see high quality earnings across sectors in the economy, but really a focus there, again, on building resilience against volatility.

Then in the fixed income segment of a portfolio, we're moving up in quality right now tactically, but as we do get that Fed pause, I'm really chomping at the bit to add sources of yield in a portfolio. And sectors that have been really beaten up this year, like high yield, like municipal bonds, I think, offer a really interesting opportunity, again, just to build some resilience against inflation, as we move through this economic cycle.