Fed may need slow down if inflation rises further in 2026, says RBC Capital Markets' Donald

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Let's get back to our panel for some reaction here, Jim. I'm going to start with you first. We showed the charts of the market reaction, equity markets have been relatively stable as they were going into this print.

speaker1

from the two year all the way to the 30. have moved. Maybe higher by anywhere from what I could see. 1-3. basis points. This is all about the Fed rate press conference now at this point. But what stood out to you from hearing what you heard from Steve? and then what you saw or didn't see from the market reaction.

speaker1

speaker4

So that's a great question. So I think that we are in the sweet spot of policy uncertainty for markets. And what I mean by that is that we're expecting there to be better growth in 2026. but at the same time, we're also expecting the Fed. to cut interest rates. So you may have higher growth. you may have a labor market which is keeping wage inflation and wages relatively stable which keeps profit margins high for companies. And again, better growth, lower rates, your discounting those future cash flows at a lower rate, you're increasing the present value. And what it's doing is it's supporting valuation. So this uncertainty that's being discussed right now. with the labor market and what fed policies likely to do and lower interest rates. Acquities of the beneficiary.

OK.

speaker1

speaker5

David.

you see it all from an asset management perspective. Does this change at all anything with regard to how you view? future allocations, how new client money gets put to work, what exactly does this mean in the construct of how investors have to view what this rate decision will mean for them?

speaker1

speaker3

Well, I think the one interesting thing was that descent in terms of not cutting at all from the Kansas City Fed President. I think that that is really interesting because it does say... It says that some pushback, and I think the pushback isn't about the economy. I think it is a badge. you know how strong markets have been this year and if that gathers it'll still it little momentum we may see a fed. easing a little bit more slowly next year so maybe not heading straight down to 3% In terms of investors here, I think. It's been a wonderful year for investors, but that follows two great years. And I'd say rebounds, rebounds, rebounds, rebounds. I mean, I think people just need to make it look at the risk side of the portfolios, and not just the very strong gains that we've seen in equity markets. Francis, you use the word. I'm going to bring it up again. You use the stagflation area as part of your response to my previous question.

Do you feel any? differently or similarly based upon what you heard from Steve, I know that we're going to break down the entire kind of report and the press conference afterwards. But do you still feel as though this is a market that is... going to succumb to stagflationary pressures in the coming months.

speaker1

speaker6

Well, we have the qualifier, Stagflation Light, and that this is clearly a long way from the 1970s, but look at what the statement says. as it flags exactly that scenario. We have job games that have moderated, we have inflation that has moved up. And that's okay for right now because the unemployment rate has it broken out. The bottom hasn't fallen out. But in inflation, well, I would say is still too high is not up at that forehandle. But one of these sides of this stipulation environment is going to break. And the Fed is not gonna have the same luxury middle of 2026 as it does now to play both sides of that. And even in the dissent, you can see we're getting dissent on both sides of the mandate right now. That's a real call up to that. The equilibrium that we're in, it's not going to last forever. Our views at inflation is gonna turn out to be the real problem and heading into 2026. The Fed is not gonna have the ability to point to the job market to the same extent as they have now. They're gonna have to slow down here when they see inflation rising further into Q1.

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