Consumer sentiment: Economy showing ‘resilience’ given Fed rate hikes, economist says

Yahoo Finance speaks with Mizuho Americas Chief U.S. Economist, Steven Ricchiuto on the Fed's fight against inflation, potential terminal rate outlook, and key economic indicators.

Video Transcript

- US retail spending came in flat in September. However, consumer sentiment coming in above estimates even as Americans expectations for inflation, they worsened. For more on the state of the economy, we have Steven Ricchiuto, who is the Mizuho Americas chief US economist. Great to have you here with us this morning.

First, just help us break down the market reaction that we've seen over these past two days to some of the economic data that really factors in everything from prices that consumers are paying to the sentiment from consumers right now.

STEVEN RICCHIUTO: Well, I think when you're looking at the overall economy in this environment you have to keep in mind two things. One thing is that the economy is showing more resilience than people had expected given the pace of Fed rate hikes. That's number one.

But we often forget that they've only been tightening since March of this year. So it's what, seven months into the process? And the shortest possible lag between monetary policy and economic impacts is six months. That's the shortest possible lag. It's a long and variable lag, tending to be sometimes to the much longer length.

So the fact that we're continuing to see inflation remaining stubborn on the upside and we're continuing to see a more resilient underlying economy all weighs back into the fact that the labor market has not had any major significant change. And this is the critical issue. The labor market continues to be a critical piece of the equation to get inflation down and to slow the pace of underlying economic activity. And in an environment in which we're dealing with a real labor market shortage, it's really hard to do this. And therefore, there's going to be much more additional rate hikes coming down the pipeline from the Federal Reserve.

BRIAN SOZZI: Steve, I don't know if you were able to catch it, but we just had San Francisco Fed President Mary Daly on. And she gave a range of potential rates where they would like to go, potentially, 4.5% to 5%. If we reach that 5% level, is the US economy still growing, and by how much?

STEVEN RICCHIUTO: Well, again, I actually have a higher terminal rate at this particular juncture than President Daly has. And that's not surprising. The SEP, as she was quoting, did not take onboard the latest inflation numbers or the latest retail sales numbers, or for that matter, the latest weekly unemployment claims numbers. And the answer to your question is the economy could still be growing because we're going to be there by the end of this year and early next year.

So we might not be into the real recessionary environment until we get into the second quarter of 2023 given the underlying resilience in the economy. So the answer is we're going to have to see higher rates than are currently discounted in the marketplace and higher rates than she's discussing in her commentary a few minutes ago.

JULIE HYMAN: Steven, it's Julie here. We've had a lot of folks come on the show and say the Fed is not quite looking at the right indicators and that that means there is this big risk of overshooting. But it sounds like you think the Fed should be even more aggressive or will end up being more aggressive here. So what indicators are you watching right now giving us a good snapshot of what's going on?

STEVEN RICCHIUTO: Well, again, watch the weekly initial unemployment claims numbers. They are the best real-time measure that we're looking at in terms of the labor market. And what we're seeing is yes, people may be losing their jobs, but they're getting alternative jobs very quickly and not showing up either in the claims numbers or showing up in the continuing claims numbers. The labor market is the key here.

And given that fact that we have a real labor shortage, this is the battle that the Federal Reserve is fighting against. And this is a battle that they have to win before they can get any declines in inflation that are going to be considered sustainable on an ongoing basis. And until we get there, we're not-- it's one of those things we're going to know it when we get there. We're not going to be able to forecast it ahead of time.

So all this analysis that we're doing about what the terminal rate should be really has to be viewed against the live input of data coming in, which is why people at the Fed, like President Daly, are telling you we're data-dependent. And what we see so far is nothing has really changed that would change our view with regard to monetary policy. And I tend to agree with them as well.

- Steve, you said in your notes to us that the buy-the-dip strategy here is misguided. What is misguided about it? And is it still-- for those who are asking themselves, should I be buying this dip, is that answer from your perspective still no?

STEVEN RICCHIUTO: And the answer is yes, it's still no. And the reason for it is markets don't really yet discount what's going to come. There are going to be corporate failures. There are going to be banks that have significant problems. There is going to be economic pain that comes about as a result of what the Fed is doing.

But the Fed really has no alternative, which is the other thing. People seem to think the Fed has an alternative. There is no alternative to what they're doing. Allowing inflation to get embedded in the system is a long-term problem that is going to require even more pain down the road. So the Fed's prescription is take your medicine now, get it over with, and let's get it done with.

And I think they're doing exactly what they're supposed to be doing. And I think people keep on wanting to look through to the other side of this story. The problem is this other side of the story could be further out in the calendar than investment horizons are set to. And that's the real reason why it's misguided.

BRIAN SOZZI: Steven Ricchiuto, Mizuho Americas chief US economist, always good to get some time with you. Have a good weekend.

STEVEN RICCHIUTO: You too. Have a great weekend.