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Inflation: There's still 'time for the Fed to change course,' strategist says

Invesco Chief Global Market Strategist Kristina Hooper joins Yahoo Finance Live to discuss central bank policy, bond yields, and the Bank of England's recent course of action.

Video transcript

SEANA SMITH: We have just about 45 minutes to go until the close. All three of the major averages pushing firmly higher here, the Dow now up 561 points. The move higher in equity coming as Treasury and UK bond yields do drop. The move coming after Bank of England's intervention in the bond market.

Let's talk about what this means for US investors in the US markets. We want to bring in Kristina Hooper, joining us in studio, Invesco's chief global market strategist. Kristina, it's great to see you. So we're seeing this reaction play out in the US markets today. But what do you make of the Bank of England's decision to intervene in the bond market?

KRISTINA HOOPER: Well, I think it was probably the best of a limited set of options. And I think that certainly, for the time being, it's been a positive for risk assets. Certainly, this, to me, reminds me of Mario Draghi's words about a decade ago when he said by any means necessary, we're going to be supporting the euro. I'm paraphrasing. And that's what we heard today. At any scale necessary, we're going to be buying. So that, to me, is a big signal that there's going to be support there.

DAVE BRIGGS: You say for the time being. Does this change the inevitable future that's ahead in the UK economically?

KRISTINA HOOPER: I don't know the answer to that. It remains to be written. But certainly, at least for the time being, this is a good sign. And who knows what the future holds in terms of amending this mini budget? All kinds of things could happen. But at least for now, the freefall that was occurring has been stopped.

RACHELLE AKUFFO: And Kristina, Rachelle here. In terms of the contagion, we usually tend to see central banks sort of moving in concert. Not the case right now. A lot of different dynamics going on within economies. What should people be keeping an eye on in terms of how what's happening in the UK will affect what's happening with the US?

KRISTINA HOOPER: Well, even the UK, the Bank of England, is moving at essentially cross-purposes because you have this QE ongoing or QE that has been started just now. But you also have rate hikes potentially in the offing, quantitative tightening in the offing. So it's creating just a high level of confusion. We don't have that with other central banks in that there's just one move, and that is towards a tightening monetary policy. So it's a lot more complicated in the UK.

But I'd also argue that in the eurozone, there are some complications as well. Again, this is a vulnerable economy, like the UK. There are some forms of fiscal support. Certainly not the kind of massive tax cuts we've seen offered in this mini budget, but certainly, some forms of fiscal stimulus in the eurozone as well because let's face it. Neither one of these two centers banks can solve for some of the major sources of inflation impacting those economies because a lot of it's coming from, for example, energy prices. So it's a difficult situation. And it's far more complicated.

SEANA SMITH: Kristina, what about potential intervention in the currency market? We saw Japan do it just a few days ago when you look back to last week. Do you think that's potentially on the table in the UK?

KRISTINA HOOPER: I don't think so just because the UK doesn't own a lot of reserves. It's just in a very, very different position than Japan is. And so I don't think that's the way-- I don't think they can do that. So I think with, again, a limited set of options, they chose perhaps the best way to approach what is a crisis.

DAVE BRIGGS: Back here at home, quite a rally on this news, as we saw the market surge. About the same time earlier today, we heard from Stanley Druckenmiller, who says he'd be stunned if there's not a recession by the end of '23 and not surprised if it's larger than the so-called garden average variety. Your thoughts on that dire prediction here?

KRISTINA HOOPER: I think it's too early to say that. Certainly, the Fed seems to be driving towards a significant recession, but I still think there's time for the Fed to change course. When you're hiking rates at 75 basis point chunks, and you're not taking the time to assess-- you're not really being data dependent, even though you pledge to be-- that's a real problem.

But having said that, the economy is in rather good shape. We're seeing corporate debt levels relatively low. We're seeing very low unemployment. So there are a lot of good things about this economy. And so I think that if the Fed were to pivot soon, we could avoid that significant recession.

DAVE BRIGGS: Do you think too much, too fast from the Fed?

KRISTINA HOOPER: Oh, absolutely. Oh, yeah, they think 75 is the new 25, and that's just not working.

DAVE BRIGGS: Rachelle?

RACHELLE AKUFFO: And it's interesting because, obviously, we heard from Powell, who was saying that we shouldn't get used to these big bump of hikes every time, but some estimates are saying perhaps 75 for the next hike and then 50 after that. What is your take? How do you think it's going to go from here?

KRISTINA HOOPER: Well, I'm hoping that the Fed has some time to assess the kind of impact it's already had. And we understand that there is a lag, and I think they do, too, that there's a lag. And so we're not going to see all the impact. And of course, we have all these central banks tightening right now. So there's a global effect there as well, a global slowdown.

So I'm hoping that the next rate hike is 50 basis points. And perhaps the next one after that is 25 basis point. They need to be more measured. This is akin to getting in the shower in the morning. You get cold water, so your automatic reaction is turn the dial in all the-- in the opposite direction. You can get scalded. And that's what the Fed is doing to us. We need to calibrate.

SEANA SMITH: Kristina, real quick, if we do see two 50-point hikes before the end of the year, what's going to be the market's reaction, do you think? Do you think we're going to drop once again below those June lows?

KRISTINA HOOPER: Well, the stock market-- well, the expectations right now are probably still around 125 deep. So if we get anything less than that, I think there will be a positive reaction, and especially if we get some signs, anything of a pivot. We didn't get anything from Powell at last week's meeting. So I think markets, risk assets want to rise. And it's just a matter of finding some kernel of optimism coming from the Fed.