The Fed will have 'a lot higher threshold for pain' in its inflation fight: SoFi's Liz Young
Decaying Family Office CEO Stan Druckenmiller joined us earlier on the show. We asked him about the Fed’s focus early this year on possible rate cuts. Druckenmiller mentioned the Fed’s dovish pivot pivot last December. And then he said this. It seemed to me the Fed was in a perfect position. Inflation was coming down, financial conditions were tightening and to some extent I feel like they fumble on the five yard line with the game on the line. His his point was that by saying the Fed cuts could come, that interest rate cuts could come, it really spurred things in the markets and things took off. Joining us right now to talk about this as Liz Young. She’s the head of investment strategy strategy at Sofi. Liz, how do you feel about where things could go? Because I think Stan’s point was he doesn’t know where inflation is going to be a year from now. That Jay Powell doesn’t go at that. He doesn’t. No, it he doesn’t think anything. Anybody knows the answer to that question and really things could go either direction. Well, I think what happened at the end of last year was we started to feel like we were pretty sure that we knew what was going to happen with inflation. It had come down in a linear fashion. Everybody felt confident that it was going to continue doing so. And then the Fed said what they said in December. I think part of the issue in December was that it was overly interpreted by markets as a dovish pivot. I think they were still trying to leave the door interpretation. I mean I it’s felt very much like anybody who was watching they, they, yeah, rate cuts are coming and sooner rather than later I think it was they would be appropriate at some point in 2024 and everybody said OK, well when’s the next meeting in 2024 maybe we’ll get them then and we got anxious for them and the market interpreted it as OK, the the Fed put is back on the table, they’re there to save us if we need them. Inflation is moving in the right direction. And then what happened was and to Stanley’s point, they had given this forward guidance and the data started to turn and then we had to backtrack and say, well now inflation is a surprise to the upside four months in a row. If that happens again for another quarter, then I think they have to backtrack this cut talk and this no hike talk, which markets are not going to interpret well. So how are you feeling about overall the economy? How are you feeling about where the markets have interpreted the signs in the economy to this point? I think right now the market is so short termy, we are hanging on every single data point, every single Fed statement. And the economy right now is just showing the Fed things that they wanted to see. So we got that first quarter of below trend GDP growth. They’ve been saying that they needed that in order to fight inflation and get it back to target. And we are expecting that we’ll have below trend GDP growth for the remainder of the year, but still positive. I think that’s a good thing if that’s actually what occurs. The difference will be whether or not the market is OK with that. I think the Fed is going to have a lot higher threshold for pain and a lot higher threshold for softness in the economy, as they should. And we need a consumer who stops overspending and doesn’t use too much credit to do so. That will eventually solve the inflation problem, or at least it should put supply and demand back into better balance. But it’s a matter of whether or not the market is going to be OK with that on the way. So far, we’ve been able to digest many fewer rate cuts than we thought. If the narrative shifts back to hikes, I mean we saw what happened last time. As soon as hikes were taken off the table, everybody was ecstatic, right? So if the narrative shifts back to hikes being possible, we’re going to see a lot of bumps. I guess the concerns, if you’re looking for something to really worry about in that scenario, not that this is bad news on the face of it, but the jobs markets still very strong. You still do see some wage growth. I guess the concern becomes if rents or rent equivalents start picking back up that that could feed the inflation right back in, right? Well, and and that as we know is a really lagging indicator. It takes a long time for things to show up in rents And then and we’ll hear the rebuttals of it’s not a good measure really of housing anyway. But there was an interesting article in the Journal today about Gen. Z and what’s happening to that next generation. So incomes on average only up from 59,000 to $60,000 a year since 2020, but credit card balances are at 2800 on average and over that period where they’ve only made $1000 more a year, rent is up 22%. So taking a bite out of certain consumers, a lot of times we talk about the lower income consumer. I think it’s also the younger consumer and who needs to be the next generation of spending and inflation. And rent is definitely taking a bite out of that. You better off than you were four years ago. If you’re paying rent, perhaps. No, I’m saying anyone that you’re talking about, it’s it’s a That’s why the numbers are where they are, because you do know. And at the supermarket, it’s the same thing. It’s like, OK, I’m not getting this, this, this and this because I don’t have. I don’t have the money at this point. For what do you substitute? Right. What do you substitute? And that’s why the numbers are where they are. Anybody that scratches their head isn’t paying attention. Yeah.