Yahoo Finance's Brian Cheung discusses the rocky market yesterday and what investors should expect from the Fed meeting this week.

Video Transcript

JULIE HYMAN: --right. The reason, at least the stated reason, by some investors yesterday for the selling was the Federal Reserve. But we know what the Federal Reserve is going to do, at least sort of, right?

Brian Cheung is joining us now. The Fed begins its two day meeting today. I mean, nothing happened yesterday, per se. The Fed didn't come out and say, well actually, we're going to raise rates by 50 basis points in March, so I don't know. But what are we expecting to hear from the Fed?

BRIAN CHEUNG: Yeah, I mean, a lot of people are freaking out and saying, oh, well, it's the Fed tightening. That is the reason why we're seeing this market volatility that began last Thursday. But it's important to remember that over the last 10 days, we've had no new Fed commentary. That's because of the customary Fed blackout ahead of any policy setting meeting.

So is all this just in our heads? Well, we do need to know that the Fed is planning on raising the federal funds rate from the near zero target that it's been holding since the depths of the pandemic. And even though we're talking about is it going to be three or four or five or seven rate hikes this year, nothing is expected to happen at the conclusion of the policy setting meeting tomorrow at 2:00 PM.

And that's because of the Fed balance sheet. The Fed has said it needs to stop its program of openly buying assets like US treasuries and agency mortgage-backed securities before it then starts to raise interest rates. Now the intricacies of that are a little bit complicated, but all you need to know is that the Fed will stop effectively buying those new assets as of mid-March, which means it won't be until that March meeting that we then start to see something more serious.

And that's a reason why you see projected timelines like those coming from Goldman Sachs, showing you what the roadmap of this type of policy tightening might look like over the course of 2022. And they say that they're projecting four rate hikes, in March, and June and September, and December, which appears to be the baseline now for four 25 basis point hikes through the course of this year. And they're now projecting that the Fed will start to actively let its balance sheet shrink, beginning in July.

Now again, I don't want to get into the intricacies, but basically the street talk is that if the Fed can start its balance sheet run up-- run off process earlier, that would actually allow the Fed to raise interest rates less to then quell inflation. The reason why is because as the Fed allows treasuries to roll off of its balance sheet, that could tilt longer term interest rates higher, which could have the effect of further dampening inflation if longer term borrowing costs are larger.

Now within the context of this current volatility, a lot of people saying is the Fed going to step in here, is there going to be a Fed put, might the Fed not signal that it's going to be as hawkish this year? Keep in mind, the story is all about inflation, getting that 7% year-over-year on the CPI down. In the absence of any sort of movement on that, it's hard to imagine the Fed looking at the S&P 500 and wanting to change course on that. Guys?

BRIAN SOZZI: And Brian, you're the Fed whisperer here at Yahoo Finance. Let's just stay on that, what you were just talking about. There is this narrative this morning that perhaps, because of this market volatility, Fed chief Jay Powell says something in the press conference tomorrow to settle markets here. Do you anticipate any of that?

BRIAN CHEUNG: I mean, I could see something along the lines of a policy is not on a pre-set course, in trying to alleviate to markets what might already be priced in, in terms of how aggressive they might want to get on their rate hikes. But keep in mind that tomorrow, we're not expected to get any sort of new update on the Fed's dot plot projections. There's not going to be any new guidance in terms of how the 18 members of the committee see interest rates going over the next few years.

And because of that, the Fed Chairman probably won't want to bite on the specifics of is it going to be three or four or five rate hikes over the course of 2022. Which is going to be not so great for markets, which have been holding on to the dot plots that you see a side of you from mid-December as a crutch, because that telegraphed the likelihood of three interest rate hikes through the course of 2022.

But guys, that was many, many weeks ago, six weeks ago to be exact, and a lot has happened since then. Notably those high inflationary prints, which is a big reason why even the doves think of a Neel Kashkari from the Minneapolis Fed, San Francisco Fed President Mary Daly have also struck a more hawkish tone over the past few weeks with regards to wanting to tighten policy.

JULIE HYMAN: Although one investor we spoke to yesterday floated the idea of the Fed being more hawkish than even the market thinks, which I find difficult to picture at this point. I don't know, we'll find out. Thanks so much, Brian, appreciate it.