Sevens Report Research Founder and President Tom Essaye to discuss the expectations for the Fed’s upcoming FOMC minutes meeting, the future of Fed policy pathway, why investors should remain on recession watch in 2023, and the outlook for markets.

Video Transcript

BRAD SMITH: Guys, for more on the recession watch talk, everything Fed speak, we welcome in Tom Essaye, who is the Sevens Report Research founder and president. Great to have you here with us this morning. Take us into what your thesis around-- and yeah, we're taking, I guess, no landing off the table and what that would mean this morning. But in terms of what we expect to hear from some of the FOMC meeting minutes, once they do come out, and comparing that with the Fed speak that emerged last week, how would the markets continue to really price in what this means for the future of Fed policy pathway?

TOM ESSAYE: Good morning. And thank you very much for having me. I think that throughout the past 14 months, really since the start of 2022, we've seen a very consistent pattern, where the market takes some data that is sort of favorable towards the Fed easing off rate hikes, and then extrapolates it out to be a looming change in policy. And we came up with buzzwords like "pivot" last year.

And then late last year and earlier this year, it was the Fed pause. Not a pivot, but a pause. And now we've sort of continued along this trend. And each time, the Fed sort of gives the market a smack, a proverbial smack, and says, no, we're not done yet. And it's kind of happening again, isn't it? And that's why stocks are down over the past two weeks.

I think the minutes will continue that trend. The simple answer is that growth is still too strong for the Fed to really ease off. So stocks can hold in as long as they don't really ratchet up rate expectations beyond much of what they think now. But if we get another 50 or 75 basis points of tightening, I doubt the S&P 500 can hold 4,000.

JULIE HYMAN: And is that what's going to happen, do you think, Tom? And do you think, as we've been talking about, that the Fed is going to push what otherwise looks like a relatively strong economy into recession?

TOM ESSAYE: Yes, I do. And again, this may be my experience of having gone through this in my career twice in the early 2000s, and then again in '07 and then '08, '09. The Fed can put the economy into recession. I think what's happening right now is that everybody is finding out that the economy is stronger than everybody thought, right?

And whether it's the employment data, whether it's the PMI data, sure, we've seen a bit of a lull. But it's still quite resilient. And that means the Fed has to keep going. Will it go too far? Yes, it always goes too far, I mean, all except 1994. So I would prefer to bat with the averages, right, rather than the one-off.