Markets are blindly expecting the best – but inflation might not cool to the Fed's 2% target until late 2024, says Federated Hermes' top stock-picker

• It's too optimistic to think interest rate rises are done, says Federated Hermes' chief strategist.
• "The market is whistling past the graveyard and expecting the best thing to happen," Phil Orlando said.

Inflation could remain a threat to markets for another two years despite the year-end rally in equities, according to Federated Hermes' top stock picker.

Phil Orlando, the investment manager's chief strategist, said in a November 23 interview that the bounce in stocks after the October inflation print showed that investors were blindly hoping for the best outcome – even though prices could remain above the Federal Reserve's target until the end of 2024.

"Right now the market is whistling past the graveyard and expecting the best things to happen," he told Yahoo Finance.

"Our best guess is that we will get back to the 2% eventually, but that trajectory might be by the end of calendar '24."

The Consumer Price Index rose by a lower-than-expected 7.1% in November, adding to evidence that inflation is in a downtrend.

The slowdown in inflation over recent months has helped the stock market recoup some of this year's losses, with the benchmark S&P 500 now up 9% from the year's lows reached in October.

But Orlando said that investors haven't appreciated how sticky inflation could be – with entrenched high prices likely to require the Fed to push rates above 5%.

"If the Fed brings the funds rate up to 5%, let's say by the end of March, but inflation is still above that, let's say 6.5 or 7%, does the Fed go on pause and make the heroic assumption that inflation is going to continue to grind lower?" he asked.

"Frankly we don't know what's going to happen in the second quarter of next year, because we don't know what the trajectory of this decline in inflation is," Orlando added. "So there's a lot that needs to happen, a lot of moving parts."

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