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.
It could take until the end of 2024 for inflation to fall to the Fed's 2% target, he added.
Inflation could remain a threat to markets for another two years despite the recent rally in equities, according to Federated Hermes' top stock picker.
Phil Orlando, the investment manager's chief strategist, said in a recent 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 on Wednesday.
"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 7.7% last month, offering markets the strongest sign yet that inflation is starting to fall.
That sparked a stock market rally, with the benchmark S&P 500 up 7.4% since October's inflation figure was released on November 10.
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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