Mizuho Americas Chief U.S. Economist Steven Ricchiuto joins Yahoo Finance Live to discuss why this business cycle differs from past recent cycles, the outlook for the economy and markets as the Fed continues along its policy path, and whether recession is inevitable in 2023.

Video Transcript

AKIKO FUJITA: Well, let's keep the Fed conversation going with Steve Ricchiuto, Mizuho Americas chief US economist. Steve, let's try to digest what we heard from Jay Powell yesterday and start with where we are on the rates. The Fed now projecting a median forecast between 5% and 5.25%. You say the terminal rate is going to be even higher.

STEVEN RICCHIUTO: That is 100% correct. I think people are missing one important aspect of this business cycle, which is it's not like the last four. The last four business cycles, or what I refer to as credit cycles, in which where the Federal Reserve raising rates created or caused an asset-allocation mismatch to erupt into a broad-based credit or liquidity crunch.

There is no evidence that the economy has any of those preconditions for a broad-based credit crunch this time through, and that means we're back to the behavior of the Federal Reserve and the economy that we experienced prior to 1990. And the economy will prove to be much more resilient than the bond bulls want to believe, and this is the difference between the two analyses.

If you don't have a credit crunch-- and I do not believe you will have one-- you wind up having a significantly higher rate of fed funds rates and held there for longer before you have an onset of a recession that can bring inflation down back closer to the Federal Reserve's target.

RACHELLE AKUFFO: And we know that the rate hikes tend to get the bulk of the attention, but you're also focusing on what you're seeing with the way that the Fed is using its quantitative tightening, and you're saying that this could disrupt market liquidity. Break down your case for us.

STEVEN RICCHIUTO: Well, again, I don't think market liquidity is going to be broken down. I think the point here is in the last four business cycles, liquidity did break down. The 1990 cycle was a commercial real estate debacle. The 2000 recession was a merchant power debacle. The 2020-- the 2007 number was the subprime debacle. The 2020 period was the COVID debacle. All of them resulted in squeezes in liquidity of the economy that caused the economy to go into a recession.

This time through, we don't see any of those mismatches. Nobody is short funded, and the Federal Reserve taking liquidity out at the pace they're doing while we had $5.4 trillion having been injected is not significant enough to really upset the apple cart in the time period in which the market is anticipating.

So I think the market is off base here. I don't think this concept that, you know, the Fed is bluffing-- I think the reality is the market is based on a historical scenario that is no longer a relevant scenario.

AKIKO FUJITA: So, Steve, the fact that you're saying we're not likely to see a liquidity crunch, I mean, what does that suggest in terms of the resilience of the economy to be able to ride out these aggressive rate hikes coming from the Fed where so many people say a recession is inevitable come 2023? What do you see?

STEVEN RICCHIUTO: Well, I think a recession will be inevitable in 2023, but we have to get to higher interest rates, and we're going to have to hold them there for much longer. You're not going to be in a period where the economy comes crashing down and the Federal Reserve reverses policy very, very quickly. You're going to have a very long, shallow recession environment.

So there's always going to be the question, are we in a recession? Are we not in a recession? We may not know we were actually in it until after we're out of it, and that could take a full year. So I think in that environment, you wind up with the interest-rate cycle, the curve staying inverted for longer and actually probably going to a much steeper inversion.

From 1990 forward, we weren't able to get to an inversion of more than 50 basis points. And, in fact, in each of the cycles from 1990 to 2020, the point of inversion became less and less before a credit crunch developed. We're already past the 1990 50-basis-point spread, and we're heading down to the 80-basis-point area, and you're probably going to have to get into the 100- to 150-basis-point area and hold it there for some time to have a recession unfold. There will be a recession, but it's going to require an inverted curve for longer and higher levels of rates to do it.

RACHELLE AKUFFO: We know investors are watching for all the signals. A big thank you to Steve Ricchiuto there, Mizuho Americas chief US economist. Thank you for joining us today.