Inflation, Recession and the Fed (October 6, 2022)

Taylor Riggs: For more market analysis, really pleased to welcome in Bonnie Wongtrakool, portfolio manager and head of ESG investments over at Western Asset Management, which has roughly $408 billion in assets under management. Bonnie, it's great to have you here. Talk to us quickly about more of the volatility within the world of bonds, as well, just another day of reversing all of the yields lower that we had earlier this week and your ability to navigate amidst bond volatility?

Bonnie Wongtrakool: Sure. Well, the market has been completely roiled by these fears that inflation is going to remain persistently high and that the Fed is going to have to tighten, sending the economy into a severe recession. And at Western Asset, we would disagree with this view. We do recognize that inflation will probably remain high through the end of the year, but we think it's going to peak and then start to decline through the end of next year. And we think you're going to see that first in goods prices. We're seeing signs of that with supply chains starting to unclog, freight costs coming down, inventories building up. And we're also seeing it in some of the more timely measures of things like rental prices, where those are also coming off the boil. So we're going to start seeing those numbers come down. It could take some time to get into the official numbers, but we will see that trajectory, which combined with slowing growth in the economy, we think will allow the Fed to downshift and take their foot off the brakes.

Caroline Hyde: So will that mean, though, a cut as soon as next year? That seems to be the narrative that the market is trying to push forward, but one that the Fed keeps fighting back on, Bonnie.

Bonnie Wongtrakool: That's not our expectation necessarily. Obviously, it's going to depend on how the data is coming in, but we don't think that the markets need the Fed to cut in order to find stability. They just need them to pause. Right now, as I said, the fear is that they'll just keep on going. Once we see a turn in the data and if it's sustainable, the Fed will communicate, I think, some downshifting and that should give support to the market.

Taylor Riggs: Is inflation or recession a bigger worry for you right now?

Bonnie Wongtrakool: Certainly the risks of a harder landing have increased given what the Fed has been saying. But we think that the economy is really in a place that is a little bit stronger than what we've seen in past Fed tightening cycles. If you look at consumer balance sheets and corporate balance sheets, they're really coming from a good place. There isn't a lot of leverage, consumers don't have a lot of debt outstanding and corporations definitely not--they have termed out their debt, their maturities. And I think that that gives more chance that the economy can withstand the tightening better than it has in previous tightening cycles.