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Interest rates: Is Fed done with rate hikes?

Philadelphia Federal Reserve President Patrick Harker claimed, in prepared remarks for the Delaware State Chamber of Commerce, that the central bank can "hold rates where they are." In September, the FOMC made the decision to hold rates steady, waiting to see how the economy unfolds. While surging treasury yields have brought inflation down, with all the economic headwinds and geopolitical conflicts, some analysts are skeptical of Harker's announcement.

Ross Mayfield, Baird Investment Strategy Analyst, joins Yahoo Finance to break down Harker's comments and what investors should realistically expect going forward.

In regards to the ongoing conflict, Mayfield explains that the Fed's main concern is domestic economy. However, Mayfield says, "If there's a shock at the pump and consumers incorporate higher gas prices into their inflation expectations, it can kind of feed the inflationary beast and the Fed would have to respond to that. It might add a little complexity to their job, but I think they'll remain focused on the domestic economy first and foremost."

Video transcript

JULIE HYMAN: I was gonna ask about the read-through to rate, Ross, right? Because there has been a lot of debate over whether rates have peaked. And then whenever we sort of have that discussion, they go back up again, right? So I wonder when we can sort of expect that peak to happen, where it can happen, and then how much of a relief that could be for equities.

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ROSS MAYFIELD: Yeah, it's tricky because, you know, the Fed controls the short end. And if the Fed decides they're done, the short end is probably at or near the peak. But the long end is much more kind of fluid. It's pressured by things like supply and demand. And we've seen that this intense amount of Treasury supply is putting upward pressure on rates.

You know, it's influenced by the economy and inflation. So if inflation is a little sticky and the economy is a little resilient, that puts upward pressure as well. You know, if there's a rush to safe haven-assets, like we saw at the beginning of the week, you could see downward pressure on rates. But I think the overall trend is still higher for longer at the long end of the curve, you know, which is something that the Fed controls to an extent but not nearly as much.

So I really think you do need-- you need relief on both to get a real broad and sustainable equity rally. But it can start with the Fed. And I think them, you know, out and saying things like they should stop, you know, maybe talking about when or what might implement cuts in the next year, give the market a little bit of reprieve could be the first step for equities kind of sustaining a bull market. But it'll take more than just the Fed because the long end is where a lot of the pressure has been in the last couple of months.

JOSH LIPTON: What about geopolitical risk here, Ross? I mean, the war between Israel and Hamas, how do you think Jay Powell and our policymakers are thinking about that?

ROSS MAYFIELD: Well, look, obviously, a terrible human tragedy going on over there. You know, Chair Powell and the Fed, I think they'll probably look through an event like this or give it some weight but not as much weight as, say, the domestic economy or the domestic labor market.

You know, they've made comments about gas prices and oil in the past, which I think is the primary upside risk here. You know, they tend to look through that. It's why they like things like core inflation because they have so little control over energy and food prices.

But they've also said that, you know, if there's a shock at the pump and consumers incorporate higher gas prices into their inflation expectations, it can kind of feed the inflationary beast. And the Fed would have to respond to that. So it might add a little bit of complexity to their job. But I think that they'll remain focused on the domestic economy first and foremost. I think that's what you're likely to hear from them if they comment going forward.

JULIE HYMAN: So we have been talking about bank earnings here today. And obviously, we're at the beginning of earnings season. What kind of catalyst is this gonna be for stocks? Are we gonna see stocks higher at the end of earnings season?

ROSS MAYFIELD: I think you could. I mean, we've had this kind of gap of catalyst. And so it's been higher rates, higher oil prices. And it's pressured equities. We've also had a big seasonal headwind through the end of the third quarter. Earnings have been positive or at least better than expected the past few quarters.

I think we're set up for another strong quarter. You know, financials are kind of challenged by some idiosyncrasies that, you know, are stemming from the high rate environment and some of the challenges last March. But things so far have been pretty resilient or pretty good. And I think we're setting up for an earnings season once again where expectations could be beat, where guidance could be good enough to put a floor under the market.

And I think you're gonna see some of the trends that we've been talking about but haven't been in focus the last few weeks and months because of the focus on rates, because of the focus on oil prices, because of the focus like a stronger dollar. I think earnings can be a real catalyst for the market here. And I think early this week, we've already started to see that a little bit.