Nomura Securities Senior US Economist Robert Dent joins Yahoo Finance Live to discuss inflation, consumer spending, recessionary risks, the labor market, and Fed policy.

Video Transcript

BRIAN SOZZI: All right. Well, let's stay on the economic outlook here. For more on that, let's turn to Nomura Securities senior US economist, Robert Dent. Robert, good to see you here this morning. I liked your recent note, you are calling out a potential mild recession. How-- what is mild first of all? And when do you see this actually happening? ROBERT DENT: So when we think about a mild recession, I think the best example we have is probably what happened in 2001, maybe a two percentage point increase in the unemployment rate, a couple of quarters of pretty weak GDP growth. In terms of timing, we're most concerned about potentially 2024. We think that the cumulative risk of a recession between now and the end of 2024 stands at about 35% to 40%. And a lot of that is just coming from what we think is going to be this very aggressive response from the Fed to actually get inflation under control and make sure labor markets actually cool down. We would largely agree that the inflation situation facing the Fed is quite a conundrum for them and it's going to be very difficult to navigate. But the labor market component should also get a lot of attention given what's happening with wage growth and the need we think for the unemployment rate to actually increase. But we're not that concerned I would say about a very severe recession like you saw during the global financial crisis over a decade ago. Right now, we're not seeing any signs of a problem in the financial sector that would pose a systemic risk. And so that's why we're leaning more towards the risk of a milder recession JULIE HYMAN: Rob, I'm starting to even see calls that after the Fed raises rates aggressively to try to get inflation under control, we will-- then we'll start to see some cuts to rates once if that-- if when and if it slows the economy too much. Do you think that that's a potential outcome at this point? ROBERT DENT: Yes, absolutely. So our own forecast is that the Fed will need to raise rates to almost 4% by the middle of 2023. That's about 100 basis points or maybe more than what the market is currently pricing. And so we do think that their aggressive response could still surprise people despite how much they've shifted in the hawkish direction over the past six months. We do anticipate a series of what we would call mid-cycle adjustment cuts in 2024. We do think the nominal neutral rate sits at around 2% and that once the Fed gets inflation under control and growth slows, they'll want to cut back down closer to 2% we think by the end of 2024. There's a good playbook for this back in the late '90s, and I would also point to what happened in 2018 and 2019 when the Fed embarked on a couple of insurance cuts as precedent for what we're expecting later in 2023 and in 2024. BRIAN SOZZI: When do you see inflation starting to slow down in a noticeable way? ROBERT DENT: We are not looking for a noticeable slowdown I would say now until 2023 at the earliest. We adjusted our inflation forecast recently to account for kind of two things. The first is very strong and persistent rent inflation, which is likely to continue this year and probably into early next year. The other is the supply chain normalization process. We just don't think is going to happen now until 2023. You have these headwinds coming from what's happening in Ukraine, you have China's zero COVID strategy again kind of scrambling ports and other things of that nature. And so we think that people are going to have to wait until 2023 at the earliest before we see a really noticeable slowdown, which should continue into 2024 as we see the lagged impact of this very aggressive Fed action that we're anticipating. JULIE HYMAN: To bring it back to what we're seeing right now on the ground, Rob, how are you thinking about the effects of inflation as it stands right now on consumer spending? ROBERT DENT: So far, we think consumers have done reasonably well, largely because they're sitting on about $2.4 trillion of excess savings from delayed spending during the pandemic, and really just unprecedented financial support from Congress and the White House during COVID-19. That has been a pretty good cushion in terms of these rising prices that we've seen across the economy recently. I think the risk is that the increases have been so widespread and so persistent that we are starting to see some signs of potential pitfalls in consumer spending. Real consumer spending in February actually declined according to data last week. I think consumers are starting to pay more attention to higher prices for things like autos, and durable goods. And so we're becoming increasingly concerned that these rising prices more broadly, including higher gasoline prices at the pump, could be enough to eventually tip consumers into a much slower trajectory for spending. We haven't seen much evidence of that so far but I think it is a concern that bears monitoring over the next couple of months. BRIAN SOZZI: Indeed it does. Nomura Securities senior US economist, Robert Dent. Good to see you. Have a great week.