Closing Bell - Closing Bell: Market Rallies following Fed’s rate hike since 2018, Fmr. National Economic Council Director on why inflation probably hasn’t peaked, and why one analyst is betting on brokerages over banks in a higher rate environment 3/16/22

Episode Date: March 16, 2022

The Dow soaring more than 500 points after the Fed raised interest rates for the first time since 2018. The market making a big turnaround during Fed Chair Jay Powell’s news conference. Fmr. National Economic Council Director Gary Cohn has instant reaction to Powell and explains why he doesn’t think inflation has peaked. Wolfe Research’s Steven Chubak on why he prefers brokerage stocks over the banks right now. Evercore ISI’s Mark Mahaney on why investors should be in defensive tech stocks amid a higher interest rate environment.

You're listening to Closing Bell In Progress. That's really the thinking there. These are fairly well understood channels, interest sensitive, and basically across the economy we'd like to slow demand so that it's better aligned with supply, give supply at the same time time to recover, and get into a better alignment of supply and demand, and that over time should bring inflation down. And I'll say again, though, we don't have a perfect crystal ball about the future, and we're prepared to use our tools as needed to restore price stability.

As I mentioned in my opening remarks, without price stability, you really can't have a sustained period of maximum employment. One of our most fundamental obligations is to maintain and restore, in this case, price stability. So we're very committed to that. Of course, the plan is to restore price stability while also sustaining a strong labor market. That is our intention, and we believe we can do that. But we have to restore price stability. Okay, let's go to Scott Horsley at NPR. Thanks, and I apologize if this covers some of the same ground you just talked about, Mr. Chairman. I think I missed some of your answer there. But I have a follow-up question

on the labor force. We have seen some gains in the prime age workforce in the last few months. I wonder what you anticipate when it comes to some of the older workers as the health outlook has changed. Are we going to see more recent retirees following Tom Brady back in the workforce? And what would that mean for wages and inflation? It's hard to say. You know, what we saw in the last cycle was that over the course of a long, steady expansion, labor force participation outperformed expectations. And that was just a, you know, it was a tight labor market, but it wasn't, it was nowhere near as tight as this labor market, but it was a tight labor market. And so people stayed in the labor force longer.

It wasn't so much people coming back in the labor force after retirement. That's not something that happens in the aggregate very much. But so that's what was happening. And, you know, more labor force participation is tremendously welcome. And of course, our policy does not in any way preclude that. This is a situation where wages have moved up at the highest rate in a very long time. And people are able to quit their jobs and move to better paying jobs in the same industry or different industries. So it's a really attractive labor market for people. And once, you know, as we get past COVID well and truly, it becomes an even more attractive one. So we hope that that will lead to more labor supply.

That's a good thing for the country. It's a good thing for people. And it also will, we think, help relieve some of the wage pressures that do put inflation more at risk. That last part is, we'll have to see whether empirically it works out that way, but in principle it ought to help with inflation as well. It's not the only thing we're looking for, though, from inflation. We're looking for help from a number of different places, and most importantly from our own policy.

Okay, let's go to Rich Miller at Bloomberg. Thank you, Michelle, and thank you, Chair Powell. I'm sorry, I'm having some communication problems, so I've missed some of the stuff you've said, and my apologies if this has been asked. Since the FOMC met last January, financial conditions have tightened markedly. Equity prices down, treasury yields up, bond spirits risen, yield curve has flattened a lot, and even further this today, dollars up. Is that welcome? And would you like to see more in

order to achieve your goals? Thank you. So as you know, policy works through financial conditions. That's how it reaches the real economy, by just the mechanisms you mentioned. And remember that the financial conditions we had for the last couple of years were a function not only of very aggressive and appropriately so fiscal policy, but also highly accommodative monetary policy. The monetary policy settings that we put in place at the worst parts of the pandemic. So it is very appropriate to move away from those. And yes, that will lead to some tightening in financial conditions in the form of higher interest rates and just the sorts of things. We're not targeting any one or more of those things, but financial conditions generally should move to a more normal level

because we know the economy no longer needs or wants these very highly accommodative stance. So it's time to move to a more normal setting of financial conditions, and we do that by moving monetary policy itself to more normal levels. When you say move to a more normal setting for financial conditions, that suggests to me that you want financial conditions to tighten further from where we are now. Am I drawing the right inference from that? Well, yes. So I would say we look at a broad range of financial conditions, and of course, when we tighten monetary policy, we do expect that they will adjust in sync over time with monetary policy. It's not any particular financial condition, but a broad range of

financial conditions. They will reflect to some extent, they reflect any number of things. But yes, we need our policy to transmit to the real economy, and it does so through financial conditions, which means as we tighten policy or remove accommodation so that it's at least less accommodative, that broader financial conditions will also be less accommodative. Thank you. Just a little housekeeping note. Those of you in this call may be having some tech issues. If so, I understand the broadcast is coming through clearly on www.federalreserve.gov. So you might go there for the audio. And now we'll go to Jean Young. Hi, Chair Powell. I wanted to ask about the balance sheet discussion you've had at this meeting.

Can you give us any more details? Did you discuss whether to cap runoffs or whether to increase those caps over what period, if there were any details? Yes, thank you for asking. So at our meeting today and yesterday, we made excellent progress toward agreeing on the parameters of a plan to shrink the balance sheet. And I'd say we're now in a position to finalize and implement that plan so that we're actually beginning runoff at a coming meeting. And that could come as soon as our next meeting in May. That's not a decision that we've made, but I would say that that's how well our discussions went in the last two days. So a couple things just to add.

We'll be mindful of the broader financial and economic context when we make the decision on timing. And we always want to use our tools to support macroeconomic and financial stability. We want to avoid adding uncertainty to what's a highly uncertain situation already. So all of that will go into the thinking of the timing around this. In terms of the, I would say this, I don't want to get too much into the details because we're literally just finalizing them. But the framework is going to look very familiar to people who are familiar with the last time we did this, but it'll be faster than the last time. And of course, it's much sooner in a cycle than last time. But it will look familiar to you. And I would also say that there'll be, I'm sure there'll be

a more detailed discussion in the minutes to our meeting that come out in three weeks, where I expect that it will lay out pretty much the parameters of what we're looking at, which I think will look quite familiar. Thank you. Let's go to Michael McKee at Bloomberg TV. Mr. Chairman, since September of 2020, you've been operating on a monetary policy framework that let the economy run hot to bring unemployment down. That seems to be over, but I'm wondering how you would describe your reaction function now. What is it that the Fed is trying to do other than bring inflation down? In other words, is it we're going to keep raising rates until it comes down to an acceptable level?

Yeah, so I want to clear one thing up again, and that is that nothing in our new framework or in the changes that we made has this was really a reflection of what had happened for the preceding couple of decades, actually. What we said was, if we see low unemployment, high employment, but we don't see inflation, then we're not going to raise rates until we actually see inflation. That's what we said, and that was the sense of it. There was no sense in which if we got a burst of really high inflation, we would wait to raise rates. That's simply not in the framework. In fact, quite the contrary. The framework is all about anchoring inflation expectations at 2%. So I do hear this, you know, that the framework, really, we can't blame the framework. It was a sudden, unexpected burst of inflation, and then it was

the reaction to it, and it was what it was. But it was not in any way caused or related, caused by or related to the framework. So come to today. You know, I think our vision on this, on the committee, is very, very clear. What we see is a strong labor market. We see a labor market with a lot of momentum, great job creation, and we see the underlying economy strong. Balance sheets are strong. Yes, there are threats to growth from, you know, from what's going on in Eastern Europe. And but nonetheless, in the base case, there's a pretty broad expectation of strong growth. But inflation is far above our target. And, you know, the help we've been expecting and other forecasters have been expecting from supply-side improvement, labor force participation, bottlenecks, all those things getting better, it hasn't come.

And so we're looking now to using our tools to restore price stability, and we're committed to doing that. And you see that, I think, in the summary of economic projections, and you see that in the decision we make, and you will continue to see it in the decisions we make going forward. If I could follow up by asking, I guess what you'd call it is the Paul Volcker question. You don't think unemployment is going to rise significantly, but if it does, does that temper your desire to keep raising rates? The goal, of course, is to restore price stability while also sustaining a strong labor market. We have a dual mandate and they're sort of equal. But as I said earlier, price stability is an essential goal.

In fact, it's a precondition really for achieving the kind of labor market that we want, which is a strong and sustained labor market. We saw the benefits of a long expansion, a sustained labor market. It pulled people back in, and there were really no imbalances in the economy that threatened the long expansion. It just, the pandemic arrived. It's just the pandemic arrived. It was just a completely exogenous event. So that's how we're thinking about it. We, of course, want to achieve, you know, price stability with a strong labor market. But we do understand also that really you can't have maximum employment for any sustained period without price stability. So we need to focus on

price stability, particularly because the labor market is so strong and the economy is so strong. We feel like the economy can handle tighter monetary policy. Thank you. Let's go to Brian Chung at Yahoo. Hi, Chairman Powell. Hopefully no tech issues here on this front. I wanted to ask just kind of the broad question about how you are communicating what the Fed's doing here today to the average American who might not be reading the dot plots or understanding what the SEP is. How is the 25 basis point hike today and then the signaling on future Fed policy going to address the inflation that they're feeling at the stores on a daily basis? Sure. So I guess I'd start by just assuring everyone that we're fully committed to bringing

inflation back down and also sustaining the economic expansion. We do understand that these higher prices, no matter what the source, have real effects on people's well-being. And really, high inflation takes a toll on everyone, but really especially on people who use most of their income to buy essentials like food, housing, and transportation, where, I mean, we've all seen charts that show if you're a middle income person, you've got room to absorb some inflation. If you're at the lower end of the income spectrum, it's very hard because you're spending most of your money already on necessities and the price is going up. But it's punishing for everyone. So it has been a difficult time for the economy, but we do anticipate that inflation will move back down, as I mentioned earlier.

It may take longer than we like, but I'm confident that we'll use our tools to bring inflation down. And you ask about rates. So the way that works, I would explain, is as we raise interest rates, that should gradually slow down demand for the interest-sensitive parts of the economy. And so what we would see is demand slowing down, but just enough so that it's better matched with supply, and that will bring inflation down over time.

That's our plan. Thank you. Let's go to Jolene Kent at NBC News. Hi, Chair Powell. Thank you so much for taking my question and doing this today. My question is a follow-up to what Brian just asked. What is your message to consumers out there who can no longer afford the basics due to this high inflation? Well, that is, yes, indeed. I mean, as I just said, you know, I think we do understand very much and we very much take to heart that it's our obligation to restore price stability. And, you know, we've had price stability for a very long time and maybe come to take it for granted. But now we see the pain. I'm old enough to remember what very high

inflation was like. And, you know, we're strongly committed as a committee to not allowing this higher inflation to become entrenched and to use our tools to bring inflation back down to more normal levels, which our target is 2% inflation. So we will do that, and I just would want people to understand that. But the way we do that is by raising interest rates and by shrinking our balance sheet, and so financial conditions will become, at the margin, less supportive of various kinds of economic activity. That will slow the economy while also allowing the labor market to remain very strong. And, you know, the good news is the economy and the labor market are quite strong. And that means the economy, we think,

can handle interest rate increases. And as a quick follow-up to that, you know, obviously the Federal Reserve walking this very complicated fine line, trying to avoid a recession. For the consumers out there who are worried about their jobs and a possible recession, what do you say to that? Well, you know, I say that our intention is to bring inflation back down to 2 percent while still sustaining a strong labor market, and that the economy is very strong. If you look at where forecasts are, people are forecasting growth that's strong within the context of U.S. potential economic output, and we expect that to continue.

And to the extent the data come in different, then, of course, our policy will adapt. But we do believe that our policy is the appropriate one for this forecast, and we believe that we can bring down inflation. We believe that we can do so while sustaining a strong labor market. The labor market is not strong in the ordinary sense of the word. We have not seen a labor market where there are 1.7 job openings for every unemployed person or where there, if you add job openings to those who are employed, that's actually substantially a larger number than the size of the workforce, than the number of people who actually count themselves as in the workforce. So this is a situation where demand is higher than supply. And when that happens, prices go up. And so we need to use our tools to move supply and demand back. And we don't think we need to do this alone. There will be

other factors helping that happen, but we certainly are prepared to use our tools and we will. Thank you. Thank you. Let's go to Simon at The Economist. Thank you, Michelle. Thank you, Chair Powell. Sorry to take you away from inflation for one minute. May I ask about the sanctions on Russia and specifically the freezing of the central bank assets? Of course, that raises a similar risk for other sovereigns around the world and their biggest companies potentially. Any concerns about in the long term how this might affect the dollar status as the preeminent global reserve currency? And in the past couple of weeks, have you had to deliver any points of reassurance to other central bankers around the world? Well, so of course, central bankers around the world are generally very, very in favor of these sanctions.

But let me say this. Sanctions are really the business of the elected government, and that's true everywhere. So the administration, the Treasury Department in particular, and other agencies, they create these sanctions. We're there to provide technical expertise, but it's not our decisions. And so I'm reluctant to comment on sanctions really much because, again, they're not for us. We have a very specific mandate, and these are really the province of elected governments, as I mentioned. So I'd have to leave it at that. Sorry. Thank you.

Let's go to Nancy Marshall-Genzer at Marketplace. Hi, Chair Powell. Thanks for taking the question. You've been talking a lot about rising wages, which on the one hand is a great thing, but are we possibly seeing the beginning of a wage price spiral? So the way I would say it is this. First of all, I would agree with the premise that wages moving up is a great thing. That's how the standard of living rises over time, and generally it's driven over long periods by rising productivity. But what we have now, if you look at the wage increases that we have, we're blessed with a range of measures of wages that all measure different things. But right now, they're all showing the same thing, which is that the increases, not the levels, but the increases

are running at levels that are well above what would be consistent with 2% inflation, our goal, over time. And that may be, we don't know how persistent that phenomenon will be. It's very hard to say. And that's really, I think, the sense of your question about a wage price spiral. Is that something that's going to start happening and become entrenched in the system? We don't see that. You can see, for example, in some sectors that got very high wage increases early on, those wage increases looked like they may have slowed down to a normal level. But it comes back

to what I'm saying here, which is there is a misalignment of demand and supply, particularly in the labor market. And that is leading to wages moving up at ways that are not consistent with 2% inflation over time. And so we need to use our tools to guide inflation back down to 2 percent. And that would be in the context of an extraordinarily strong labor market. We think this labor market can handle, as I mentioned, tighter monetary policy. And the overall economy can as well. But yes, wages are moving up faster than is consistent with 2% inflation. But it's good to see them moving up.

But it wouldn't be sustainable over too long of a period to see them moving up that much higher. And that's because of this misalignment between supply and demand. We expect to get more labor supply. We did last time. We got more than we expected during the last cycle. This time, we've gotten much less than expected. So it's not easy to predict these things. But we do expect that we'll get people coming back in the labor market, particularly as COVID becomes less and less of a factor in many people's lives, something we all wish. So that's how we think about it.

Thank you. And for the last question, we'll go to Don Lee at the LA Times. Hi, Chair Powell. I think you said to the Senate earlier this month that, in hindsight, the Fed should have moved earlier. And it sounds like today that you don't think that the Fed is late. And I just wanted to get your clarification on that. And if it is, if you still think that the Fed is behind the curve, how much behind the curve is it? Right. So we are not, we don't have the luxury of 2020 hindsight in actually implementing real-time decisions in the world. So the question is, the right question is, did you make the right decisions based on what you knew

at the time? But that's not the question I was answering, which is knowing what you know now. So I think if we knew now, of course, if we knew now that these supply blockages really and the inflation resulting from them in collision with, you know, very strong demand, if we knew that that was what was going to happen, then in hindsight, yes, it would have been appropriate to move earlier. Obviously, it would be. But again, we don't have that luxury. But that's a separate question from your other question, which is behind the curve. And, you know, I don't have the luxury of looking at it that way. You know, we have our tools, powerful tools, and the committee is very focused on using them.

We're acutely aware of the need to restore price stability while keeping a strong labor market. And what I saw today was a committee that is strongly committed to achieving price stability in particular and prepared to use our tools to do that. We're not going to let high inflation become entrenched. The costs of that would be too high. And we're not going to wait so long that we have to do that. No one wants to have to really put restrictive monetary policy on in order to get inflation back down. So frankly, the need is one of getting back up, getting rates back up to more neutral levels as quickly as we practicably can, and then moving beyond that if that turns out to be appropriate. And as you can see, it is appropriate in the sense to people's SEPs, they do write down levels of

interest rates that are above their estimate of the longer run neutral rate. And there's also a range of estimates too, as you will see if you look at the details of the SEP. But thanks for your question. Okay. Thank you all. Thanks, Mr. Chair. Thank you. Fed Chair Jay Powell making the first move to fight inflation. What a round trip for the markets. Take a look at the S&P 500 right now. We are in rally mode after the Fed chair gave commentary, said expects every meeting to be live. In other words, we could see ongoing interest rate hikes potentially at every meeting this year. A lot of it was priced in. S&P is up 1.6 percent. It fell just before the news conference and then rallied right back. The Dow also trading higher right now. NASDAQ as well. If you look at what's happened in the bond market, it really tells the story.

You saw yields shoot up immediately on the back of the statement. Think that initial seven hikes per year, which was predicted by the dots or the forecast from the Fed, came as a surprise. But then as Fed Chair Powell started talking, those yields started coming a little bit lower. The dollar is weaker. Overall, taken as the market was pretty much expecting this. Joining me here at Post 9, former National Economic Council director and former Goldman Sachs president, Gary Cohn. Gary, welcome, especially after a big Fed day like this. Glad to have you by my side. Thanks for having me. It's great to be in person.

Yeah. Yeah. It's great to have you here. So first, give us your first take on what we just heard from Powell and the market reaction. It looks like a little bit of a celebration. Well, I think you take two things out of this. Number one, I think the chairman kind of admitted he was behind the curve and he came out. He didn't say it. He said, let others make the judgment. I said he kind of admitted it. He admitted it by saying seven this year, four in the following years. So he put 11 rate hikes on the table. And to me, that was without ever saying I'm behind the curve, saying, OK, we've got some work to do ahead of us. But I also think by doing that, he has got the market in a position where

he is now, as you said, put him in a position where every meeting is live. But every meeting being live means that he doesn't necessarily have to raise rates at every meeting. But he has prepared the market for a position where he could, if he wants to, raise rates at every meeting going forward. Do you think the next surprise could be actually they don't raise interest rates at every meeting? Well, I think that's the position he's put us in right now. I think by saying every meeting's live and saying I'm going to raise at every meeting, he's probably put that optionality on the table. That's how I interpret it. I think that's how the markets have interpreted it. And I think they're interpreting this, OK, he's admitting where we are. He's admitting where the, in many respects, he's

admitting they're behind the curve. He's admitting where inflation is. But why is that a good thing for the market? Although the inflation number they put out is not one that I think they can get to. Right, so they expect 4.1 percent at the inflation number they put out is not one that I think they can get to. Right, so they expect 4.1% at the end of this year. Yeah, I don't think they can get to that in any way, shape, or form. What would be a more realistic target? They're going to get help on inflation. They're going to get help on inflation because, as you know, the baseline is going to get better for them.

As we get into the second half of this year, we started having a lot of wage and commodity inflation in the second half of last year. So when you look at the year-over-year numbers, the comps get dramatically better. So literally by doing nothing except moving the months forward, our year-over-year inflation numbers are going to start looking better and better, whether he raises rates or not. But you still think 4.1 is aggressive? I think anything with a four handle, that's pretty aggressive. I think he'd be lucky to see something with a five handle.

It's probably somewhere in the high fives, low sixes is what we're going to get. We still probably haven't seen the peak. You know, a lot of this volatility that's still in the system has not fed completely through. We've still got a lot of input inflation. We're going to see that on the commodity side. Everyone talks about oil. No one talks about the agricultural market. The agricultural market is probably more important now watching wheat than the oil. It is. It's more important than the oil market. The oil market,

you can turn on, you can turn off. You get planting seasons in the agricultural markets. And if you miss the planting window, it doesn't reoccur. So the oil market is a little bit different. We're just talking about, can you ship it? Can you ship it out of certain places? Are you just placing oil from one market to another market? And I think we found that that's what's happening. That's why prices sort of resumed back to where it was sort of pre-Ukraine situation. But the wheat market is completely different. You know, the wheat market, we're going to get one planting season. Jay Powell can't do anything about the planting season. Dow's up 333 points. Gary, stay with us. Do want to get to Steve Leisman, who is part of Fed Chair Powell's news conference. Steve,

what were your big takeaways? I would just like to say that I am sure that Fed Chair Jay Powell hopes Gary Cohn is right, and they do get some help from a lot of sources. That was part of Powell's presentation. Sarah, I was struck by the change in the forecast. I don't think you can help but being struck by that. The fact that the median Fed official now sees restrictive rates for the next two years. And as I said in my question, the Fed still doesn't catch up. Inflation still runs, according to their own forecast, above their target for two years while they're restrictive and above the neutral rate. So Powell kind of hinted at this, but you have to be on your mark now.

As hawkish as this was, as the idea that a decision to hike the balance sheet is probably coming in May, Powell also was not shy about saying, hey, we might do some 50s. We might go faster. Take a listen. We'll be looking at the data as they come in. We'll be looking to see whether the data show expected improvement on inflation. We'll be looking at the inflation outlook and making a judgment. And we'll be going, each meeting is a live meeting. And if we conclude that it would be appropriate to raise interest rates more quickly, then then we'll do so.

Might be by the summer before they conclude that. Just take a real quick look, Sarah, at the probabilities. What you see here is real firm confidence that the Fed hikes the next four hikes and a little bit less. But really today, Sarah, those seven hikes that are in the Fed forecast, those are priced in. And that December hike was priced in almost immediately. Maybe Gary Cohen is right about that. They don't get there, but that's where the market's priced right now, Sarah. Steve Leisman, Steve, thank you very much.

So ultimately, how many things, how many rate hikes do you expect this year? Look, I don't know. It's really going to depend on where we head with inflation. I still think we've got inflation in the system. I'm more concerned about the wage side of the equation. If you look at the data at the end of last month, we still had 11 plus 11.3 million unfilled jobs. The labor market is tight. When I'm out talking to CEOs and we see it every day,

their biggest issue is hiring people and retaining people. And we see it in the data every day. And that's the biggest restraint on companies today. You know, you've also got the supply chain issues. The supply chain issues are not freeing up anytime soon. And so those... And it's getting worse in China. Well, with COVID going on right now,

we don't know what's going on. But clearly shutting down some of the cities, some of the important cities that export technology in the United States, it could be getting worse. Here's another thing that Powell said that struck me. He said that the economy was well positioned to deal with the rate hikes and said that recession risks are, quote, not particularly elevated. All signs the economy is strong, which is certainly soothing and reassuring to hear. But is it right? I agree with that. I agree. Look, consumer balance sheets were in great position coming. You never think we're in. Gary texts me every time I'm on saying stop talking about recession. We're not going. Have I been right so far? You've been

right. OK, good. So eventually I may be wrong. I may change my mind. I mean, it is against you. Consumer balance sheets, corporate balance sheets are in really good position. So you look at that. You look at wage growth, especially at the bottom quintile, bottom quartile. Wage growth has been very, very good. And as I said, there's jobs available. So if you look at what's going on and you look at what's driving the economy, I think we're still in very sound footing.

I think Paul was right. If we're ever going to be in a position to deal with increased rates, it is now. And believe me, it has been telegraphed. The market, as you said, you opened up talking about how the market was prepared for this. The market accepted it. The stock markets rallied. And rates are about where we would have thought they would be at the end of the day. Even with, though, the situation in Ukraine, the fact that Russia's cut off now from the global economy, which has stronger ripple effects on Europe, which is now risking a third recession in the last two years, and will certainly affect us.

It will. Think we can handle it? Look, we can handle it. It's clearly going to have an impact. We can't discount what's going on in Ukraine. It's a horrible, horrific situation, and no one should discount it or put it to the side. But from an economic standpoint, we in the United States here are in relatively to very good position. We've got supply chain issues.

We've got other issues. We've got the wheat issue. Ukraine rushes clearly in the middle of the wheat issue. They're in the middle of the nickel issue. They're in the middle of a bunch of the other commodity issues. They're all going to have an effect and they're all inflationary effects. But we are in a strong enough position. I think we're resilient enough to get through this. So does that mean that stocks are a good bet right now? The fact that they've priced in all of these hikes that Powell is talking about and you don't see us going into

recession? So Sarah, that's a different discussion. So roll the clock back to when we went to easy monetary policy and we went to zero rate policy. We went to very accommodative. What happened? You're talking depths of COVID. Yeah. No, I'm talking before that, way before that, way before that. Go back years when they first started. What happened? We saw companies do very well, and we saw their stocks do extraordinary well because there was no place for people to put their money. So we saw multiple expansion. You could see a company earn the same amount of money year one and year two,

but their stock value would go up. What happened? The multiple of that company went up. It was going up because there was no real other alternative where to put your money. So we saw multiple expansion for many, many years. We are now starting to see the opposite effect. As we've started to talk about Fed tightening and we're starting to see alternative places to put your money, risk-free rates going up, credit spreads widening, investors have alternative places to put your money. So what are we seeing? We're seeing multiple compression. Multiple compression is painful. It really is painful. Companies are doing well. You see it every day.

In the last couple of days, we've seen the airline industry talk about how they can sell every seat. You saw Uber talk about how well they're doing. We're not hearing about companies telling us they're doing poorly. We hear about companies coming on, telling you how well they're doing or pre-announcing. So companies are doing well, but we're seeing this multiple compression because the Fed is starting to go to a tightening policy. That means we have to figure out what multiple should be based on where monetary policy is going to be. That will determine whether you should buy stocks or not. Does that mean you wouldn't be in tech stocks right now, for instance? Not necessarily. I mean, tech stocks are a generalization.

Some of the tech stocks have gotten to relatively cheap multiples. Some are still at very high multiples. And you've got to look at growth rates. I think you've got to get back to looking at individual stocks and looking at where their multiples are, looking at their growth rates, looking at their historic multiples and understanding what fair value is. Are you still heavily invested in stocks, or have you moved to cash? I got out of some of my portfolio at the end of last year, maybe for the wrong reasons, maybe for the right reasons, but I definitely got out of some of my portfolio last year.

Gary Cohn, great to have you here on a Fed day. Thank you. Thanks for having me. Bank stocks take a look, significantly outperforming the market today. They like the sound of higher rates. Up next, we'll hear from an analyst on the best way to invest in that space following the Fed decision. And you may be surprised by his top picks. That story and more when we take you inside the market zone. And remember, you can listen to Closing Bell on the go.

Following the Closing Bell podcast every day on your favorite podcast app. Dow is up 291. We've really rallied off the Fed news presser by Fed Chair Jay Powell. We'll be right back. Up 318 on the Dow on this Fed day. We are now in the closing bell market zone. CNBC Senior Markets Commentator Mike Santoli here to break down these crucial moments of the trading day with me. Plus, Wolf Research's Stephen Chuback on financial. Scott Wren from Wells Fargo with his market takeaways from the Fed decision. Let's get straight to the market and the Fed and the reaction we've seen.

We saw stocks take a dip after the Fed statement at 2 p.m. after the Federal Reserve forecast seven interest rate hikes this year. That's six on top of this one. Mike Santoli, then we climbed back during the Fed chair's commentary during his press conference. He was soothing when it came to talking about how strong the economy was and seemed a little flexible. He actually used the word nimble when it came to interest rate hikes. What do you make of the reaction? Yes, there was definitely lip service to being nimble. He did at one point say, obviously, that as the data come in, if they're different from their forecast, they will adjust.

But I have to say, he basically walked right by multiple opportunities to seem more flexible or more dovish. So you do have that committee projection, a median of six more rate hikes. Well, probably more than expected, but about what the market had already priced in. If I'm trying to read the market's mind, one, we're oversold. We're just going back to the morning highs. And you could always count on some switchbacks even the day after a Fed meeting. So there's no final verdict on the market's view. Yield curve flattening significantly, basically feeling as if lots of rate hikes, maybe it's going to really slow down the economy and they don't necessarily believe they'll get all those hikes in.

The final piece of it is the committee's projection for core inflation by the end of the year at 4.1 percent, yet still only six rate hikes. I think that suggested that, in fact, the committee doesn't feel like it's going to have to chase inflation. It operates with a lag. It's basically maybe one per meeting, every meeting live, but not necessarily looking more than that. And finally, he said the market's already done a lot of tightening for it, and that's what we've been talking about for weeks. I just want to point out some of the areas of the market that are doing best right now.

The ARK Innovation ETF, which we know has been hammered by the fear of rising rates, it's up 9% right now, still 55% off its highs. The Nasdaq 100, it's up almost 3% right now, still 17% off its highs. But we are seeing a big move. Also in the China-related names, which have been hammered lately, Mike, Las Vegas Sands up 11%, Wynn Resorts up 7%. As we saw some relief in that market, I know we'll talk about that in a moment. Let's hit the financials, though, because they are among the best performing sectors right now, gaining steam after the first rate hike since 2018. Signals for more. Stephen Chuback covers the banks at Wolf Research. Stephen,

what do you do with the banks after what we heard from the Fed? They're down this year about two and a half percent. Yeah, so thanks for having me on, Sarah. Look, in terms of the setup, banks are coming off a strong year in 2021. That outperformance has continued so far this year. I know they're down a little bit to start the year, but they're outperforming the broader market by a pretty wide margin. And that optimism is going to continue given the expectation around policy trajectory. Six hikes this year, three hikes next getting baked in. History tells you the banks, the overweight banks trade typically works through the first four or five rate hikes.

But the banks typically lag thereafter, particularly in periods of persistently high inflation. You get the benefit of higher rates, but then the dark side of higher rates starts to trickle in, whether it's higher credit costs or weaker fee income in a slowing economy. So from our point of view, I'd say I'm comfortable being overweight the banks here through at least the first three or four rate hikes. However, my preference is still to be long rate sensitive plays with limited credit exposure. And the best play on that are the names that are actually up the most as we speak, names like Schwab, LPL Financial, and Morgan Stanley, wealth management firms that just don't have a lot of credit exposure but have significant

asset sensitivity. Those are the best-performing financials right now. As you mentioned it, Schwab up 6%, Morgan Stanley up 6%. Explain why. What's the linkage there with higher rates and why they would do better than, say, a Bank of America, which is typically mentioned as one of the biggest beneficiaries from higher interest rates and loans? Yeah. And look, Bank of America is certainly rate sensitive as well. But the challenge is, and you guys were talking about this on the program earlier, there's still recessionary risks that are steadily building, right? And persistently high inflation, concerns around yield curve inversion, all these issues collectively suggest that recessionary risks are rising. And against that backdrop, you really want rate exposure, but names that also have much more

resilient earnings profiles under stress. Charles Schwab is going to benefit from increased volatility. Their cash builds in periods where markets are declining. And so I could even make a case that their earnings will improve under greater stress. And other names like LPL and Morgan Stanley will see modest earnings pressure, but there are natural hedges or offsets in the model that really support being long those names while avoiding potential recessionary risks or pressures that we could that we could see in the traditional banks like B of A and J.P. Morgan. Do the banks need yields to continue to rise? We're seeing it today. We've seen it lately, but it doesn't always happen so intuitively with the Fed raising rates, especially with some of the broader economic fears around global growth and even here in the U.S.

Do we need that to work? Well, the good news, Sarah, is that where yields are today are well above the back books for these banks. So said differently, most of the banks reinvested in securities around 125 to 150 basis points. Those same proxies are now 100 basis points higher. But where yields are to me is less relevant in a vacuum. You really have to look at the shape of the yield curve. That's going to matter far more. We are seeing some flattening today. If we do end up seeing inversion at the 2s, 10s, that's where I'd be a little bit more concerned. That's where I'd lighten up a little bit more aggressively on some of these bank stocks.

Stephen Shuback. Stephen, thank you very much. Mike, it's such a divergence in some of these bank performance so far year to date. You've got some names up, I don't know, 18 to 10 to 18 percent. And then some of the regionals in particular down for the year. What do you think of the strategy to go with the brokers on rising rates and hedge your risk there to recession or a weaker economy? It's the cleanest way to do it, right? You're just talking about customer balances. They earn the rates on that, and that's the reason the stock's moving. There's others in that general category, too, though, like the custody trust banks like Bank of New York, State Street, Northern Trust are a little bit different. There's a wealth management and asset management component there

as well. But it is kind of the playbook. I did look back, though, in terms of general bank valuations at the start, the outset of the last tightening cycle, 2015, they were much cheaper then, right? So the overall bank group probably just isn't as cheap, therefore might not have quite as much leverage purely to the rate story as we, whether it's right or not, are talking about being in kind of a late cycle environment for the economy. Financials, the third best performing group right now. The other two are tech related, technology and consumer discretionary. Let's talk about that. The large cap names falling off briefly after that Fed announcement, and then they bounced back like everything else.

The Nasdaq just hitting session highs of more than 3 percent right now. Joining us now is Evercore head of Internet Research, Mark Mahaney, who's become, Mark, sort of an interest rate strategist because, as Gary Cohn was just saying, it's not like the fundamentals of these companies have changed that much, but the valuations, boy, have they been whacked. So how do you interpret the Fed outlook as far as what it means for your coverage? You're right, Sarah. This has been the most negative tape I've seen for growth equities since the end of 2018. And there was a similar setup there. If we get real conviction, confidence in the rate of interest rate increases, then growth equities and tech

stocks can work again i don't know that may require another fed meeting um uh for that to for us the market to really gain confidence in that so i'm going to be continue to be kind of defensive in a in a sector that really doesn't have a lot of defensive names but i'm going to stick with the names like amazon and google this the two best highest quality uh names in the in the And I can buy them on sale, particularly Amazon, because I think there's some wonderful fundamental catalysts for that name later in the year. And then I also like what I call Venn diagram names. So those that are high quality and are clear recovery names.

That's names like Expedia and Booking.com or Booking Holdings. It's a nerdy name for it. Mike, the mega cap tech names, they've been really hit right now, though, rallying meta is having a nice more than four percent move. Have investors distinguished between the defensive names that Mark likes, the quality names within technology and some of the other growthier places? And where does that stand right now? Because there's a big catch up right now. Yeah, I think it's up nine percent, as I mentioned. I think they have obviously the market has made some distinctions in terms of, you know, who's outperformed on the downside more. So Apple had

held up pretty well. I think it's still kind of holding its own better than some of the mega cap names before. It is that kind of you know, it's a balance sheet story. It's a stability story. Microsoft just had too good a run last year, I think, and so I have more to give back. But even at that, it's not really, you know, in some kind of pronounced downtrend. So, yes, there's distinctions, especially if you want to look at it against something like Meta. What I see going on today, though, is it's a bit of a sign that investors felt underinvested going into a market that was going to be holding support, that was going to try to rally, that was going to feed off these oversold levels. And the areas that have been hard hit are getting the better benefit.

It's really just the reciprocal math of hardest hit getting the most upside today. So, Mark, and those are probably the ones that you want to stay away from, ultimately, because you like the defensive names like Google, you said, and Amazon. What don't you like within your tech universe? Well, high multiple future growth. I'm sorry, high multiple future profit stocks are still going to be under pressure for a while. They'll have these big one-day bounces in an environment like this. I just don't know whether the bottom has really been put in on NASDAQ.

And if I look at the range of corrections that I've witnessed over the last couple of decades, this would be a relatively short correction. I could see it getting steeper and I could see it lasting longer. I hope that doesn't happen, but that's what history would seem to suggest. But at some point in the next couple of months, you get a chance to get into some of these growthier names that we like, names like Roku, names like Spotify, names like Shopify too. But for now, those high multiple, especially Shopify, those high multiple future profit stocks, they're going to be hard to see having. We think it'll be hard to have sustainable gains, you know, the next couple of months.

The next year, fine. If that's your investment horizon, I've got some great picks for you. But not for the next three months. You brought it up, not me. But I was going to give you a little grief on Spotify, because I know you've been pounding the table on this name. And it just has not been where the market is right now. Those kind of stories.

You're right. It's a company that's waiting for a gross margin catalyst. I think it's out there. I've been saying that for a year and I haven't seen it yet. But I think the levers are out there and specifically as they get more advertising revenue spent by artists and labels, and as they start scaling up against all that podcast content that they've got on the site. To me, that's one of the best examples of a company that's under-earning. Spotify's gross margins in their ads business is like 10%, 11%, 12%.

There's no other internet ad business that's got gross margins that low. That, to me, either they're massively misexecuting or they're just extremely aggressively upfront investing in content. I think that's what's happening. So you'll see those gross margins work up. And I want to be long the stock before that's clear to everybody else. All right. Stick it, sticking with it. It's been a painful one. It's down 50 percent or so in the last 12 months. Yes. Having an 8 percent move higher today. Mark Mahaney, thank you. On the tech theme, did want to mention the chip stocks. They are outperforming the broader tech sector right now, currently up about 4% or so. Micron is the leader here after getting an upgrade to outperform at Bernstein. The firm saying that while macro concerns have prompted a sell-off in the stock

recently, Bernstein doesn't see the Russia-Ukraine conflict disrupting supply or demand for DRAM memory chips. NVIDIA, take a look, also moving higher after Wells Fargo added the stock to its signature picks on data center momentum and the potential for NVIDIA to expand its auto business. Are investors getting a good deal here with these chip stocks, Mike, that have been hurt lately on the concerns around everything from inflation to higher rates to Russia-Ukraine-'s slowdown, all the above? A better deal, I think you can say.

It remains to be seen if it proves a good deal. I'll tell you, Micron and NVIDIA, well off their highs. NVIDIA 30 percent off its highs. The earnings forecast for this year are up for both companies since the beginning of 2022. So that tells you it's all been about reallocation of equities out of growth. It's been about multiple compression and probably digestion of a really good couple of years coming in. So all that suggests, you know, it's not the worst opportunistic call to say things look OK right here. I don't know what the right price to pay for an NVIDIA is, but over time it's been

certainly growing into a towering valuation. And now it's in kind of the 40 times forward earnings range, which is way less of a nosebleed level than it's traded at in recent memory. NVIDIA up 6%, down 17 on the year. Take a look at the Chinese tech stocks like Alibaba, JD.com, Baidu. They're all surging today, more than 20%. After Beijing said it would support its stock market. The China Internet ETF is actually on pace for its best day ever, basically erasing all losses from the past week. But Christina Partsenevelos has been doing some digging on why, Christina, this might not be

an all clear for these names. It's an interesting move. What, just two days after JP Morgan called the group uninvestable? Yeah, and downgraded 28 separate companies. But you have the first time China's addressing this publicly, saying that they're going to support a lot of Chinese firms, but they're not really providing details as to how they're going to do that. And you talked about those stocks being high, up what, above 30 percent. But if you look year to date, many of them are just all in the red, K-Web down 15 percent. So what are we still seeing? Regulatory risk. Of course, you have the SEC that still wants many of these U.S.-Chinese listed firms to provide audits to back up their financial statements.

If they don't do so within the next three years, they're delisted. Maybe they can work through that. So a second risk would be the fact that GDP growth in China is starting to slow down. Is it fully priced into these stocks? The zero COVID policy, point number three. If that lasts for more than a week, we could potentially see a further sell-off because tech, regardless, gets lumped in in these Chinese stocks. And then you do have some concerns. People say it's not true, but the United States told NATO that China was willing to

provide economic and military aid, Western sanctions. That could be a big question mark there, could hurt the sector as a whole. So there are still a lot of risks for this group, despite China. Moving forward. Christina Partanavos, got it. Thank you very much. Stocks broadly rallying here. The Nasdaq's up three and a half percent almost into the close. Let's bring in Scott Wren, Wells Fargo Investment Institute senior global market strategist. What did you take away from the Fed, Scott? Are you as enthusiastic and happy as the market seemed to be? Well, I tell you, Sarah, I thought you used the perfect word,

which was soothing. And I thought Jay Powell did a pretty good job. You know, in the past, from time to time, he's said a few things he probably shouldn't have, or the tone was maybe not all that great for the market. But I think he was soothing. And I think that the market fully expected the series of rate hikes. Obviously, the market expected the 25 basis points. And you could tell the initial reaction when you look at the dot plot and basically, you know, more of their projections were showing a greater magnitude really out this year and for the next two years. And so I think that was why initially the market pulled back and was negative very briefly. But overall, I think he's right.

Labor market's great. Interest rates probably aren't going to go up. Let's say the yield on the 10-year, a whole heck of a lot higher than where it is now. Consumer spending should be good. up, let's say, the yield on the 10-year a whole heck of a lot higher than where it is now. Consumer spending should be good. We lowered our GDP number recently, but still it's over 3 percent. So I think there's a lot of good things going on. And having the Fed funds rate up higher, that's not going to kill the economy, I don't think. It says a lot, Scott, that you think it's soothing to hear that every meeting is a live meeting for interest rate hikes and that the Fed talks about significantly shrinking its balance sheet. And that's OK with

the markets. But I guess it speaks to how far the market has gone into pricing all of this in. Do you trust it, though? Would you have it coming in and buying tech? You know, I think so. You know, Sarah, you know that we've liked tech. Clearly, tech has been an underperformer here. We like communication services. That's been an underperformer as well. But we see good profitability there. It's been a relative underperformer. We would call it an opportunity. So I think you do need to take advantage of this. And one of your previous guests just said, you know, if your view's out more than 12 months, you know, this is a good spot to buy. And we would agree with that. I mean, if your time frame's three months or six months, well, you know, what's Putin going to do next?

I mean, we don't know, but that's probably going to affect the next three to six months. But when you look out 12, 24, 36 plus months, you have to take advantage of relative underperformance and just absolute underperformance. And we're 10 percent off the all time record high. We haven't done that for a while. We've been a little bit lower. But, you know, for us, the market's going to be higher at the end of the year. Scott Wren, thank you for joining us with your first take. We've got a solid two percent gain here for the S&P 500. NASDAQ up three and a half percent. Got about two minutes left to go in the trading day. Tenure yield, Mike, to 18. We've got a solid 2% gain here for the S&P 500. NASDAQ up 3.5%. Got about two minutes left to go in the trading day.

Ten-year yield, Mike, $218 weaker. What are you seeing in the internals? Yeah, it's been very strong all day. So no real letup in the internal strength of this rally today. It's not at that 90% upside volume threshold which some people look for. But that is very heavy, absolute levels of volume. And you're looking at 5 to 1. It's not too bad in terms of that ratio. So clearly a pretty good thrust higher here.

Take a look at consumer discretionary on a week to date basis compared to health care. This is basically offense versus defense. And the offense has caught up week to date and overtaken just by a little bit. The leading defensive sector for this year, which is which is health care, the volatility index actually sending a pretty positive message. It stayed above the 30 level for a couple of weeks, has cracked below it. Now we're under 27. The history of when the VIX stays above 30 for a while and comes back down is forward returns for equities tend to be good. So clearly the market is able to rally against what I would argue was not really a soothing or dovish message from Jay Powell. I think he took every opportunity to seem more resolute on inflation. He called the labor

market tight to an unhealthy degree. So I actually think this shows you just how much the market was spring loaded to rally. And there's a little bit of a catch up. We're still need to prove it, though. Forty three fifty ish is right around that borderline of reflex bounce or something more to the upside, Sarah. I think it also, Mike, shows the pain trade is higher. That's the point. Exactly. Yes. All right.

Let's show you what's happening into the bell. We've got just about a minute left to go. And the Dow is sharply higher of 488 points. Believe it or not, this is the third day in a row that the Dow is higher. We've now gone positive for the month of March. And it's our first three-day win streak for the Dow since back in February. S&P 500, higher, 2% gain there, a little more than that, 2.2. We're building into the close here. The only sectors that are negative are energy and utilities. Everybody else is up. Tech is in the lead.

Financials are doing well. Materials are doing well. The cyclical groups. It's sort of an all-inclusive rally except for energy and utilities. That does it for me in closing bell. Thanks for being with us on the most important hour of trading. We'll see you tomorrow. Let's send it over to overtime.