Markets shouldn't get caught up in recession fears, and the Fed's credibility is near an all-time high, Jefferies' chief market strategist says

• Markets shouldn't fixate on the potential for a recession, Jefferies' chief market strategist says.
• David Zervos pointed to strong economic data and anchored inflation expectations - a sign that the Fed has restored its credibility.

Markets shouldn't get caught up in fears of an impending recession or a market crash, and the Federal Reserve's credibility is near an all-time high, according to Jefferies' chief market strategist David Zervos.

"I don't think we should get caught up in the recession [that] really brings about some sort of major catastrophe for markets. The Fed probably needed to engineer a lot of this aggregate demand slowdown to anchor inflation expectations," Zervos said in an interview with CNBC on Wednesday.

His comments come as investors grow fearful that the central bank's scramble to reign in inflation will tip the economy into a recession. The Fed has hiked rates by nearly 400 basis-points this year and is in the process of unwinding its massive balance sheet by letting trillions of dollars worth of Treasuries and mortgage securities run off.

But economic data remains strong, Zervos noted, which is buffering the shock of Fed rate hikes. While the US saw negative GDP growth in the first two quarters of this year–and could see "a couple more" quarters of negative GDP, he says– nominal growth is still strong, which is atypical in a recession. That's propping up inflation, but it also helps corporate earnings and valuations in the stock market, softening the blow of rapid tightening.

Meanwhile, other areas of the economy are starting to cool off. Inflation has come down slightly from a 41-year-high to 7.7% in October, and the 5-year, 5-year forward, a measure of five-year inflation expectations five years from now, clocked in just above 2% in December, according to Federal Reserve data.

"They've done it," Zervos said of the Fed anchoring the market's inflation expectations. "Everything suggests to me their credibility is actually near an all-time high."

Other economists have criticized the central bank's delayed response to inflation this year. The belated policy response means the Fed can't afford to let up on its rate hike regime too soon, according to top economist Mohamed El-Erian, as that would cause inflation expectations to become entrenched in the economy.