RICK RIEDER: So I think the markets took a deep breath on today's report and got some satisfaction around. Yesterday's report was concerning the market. I mean, it's interesting when you actually take PPI. It's a big component into what gets into the Fed's thinking around core PCE.

And this gives you a bit of comfort around those numbers, which we think are going to settle in around the 2.6%, 2.7% level for core PCE. So I think part of why the equity market has gotten a bit of relief today is on the back side of it. Listen, the data yesterday, the CPI was concerning, but it's really the service sector that is really seeing this, sort of, level inflation, which is hard for the Fed to bring down and a question of how much are they going to fight that over the coming months.

JULIE HYMAN: Well, that is the big question of how much they're going to fight that, right? Because we've had some of your peers on the Street, including folks at Deutsche Bank and Bank of America now, coming out today and saying only one cut is going to happen this year. Where are you in terms of your number of cuts? Where are you, guys?

RICK RIEDER: So I'd say a couple of things. I'd say I think the Fed would like to still get a couple of cuts in. I mean, if you break down where that inflation comes from, look at things like insurance, health care, education, they're not terrible. Those are primary drivers of where-- I mean they're not cyclical.

They're not influenced by the interest rate. And what's happening is you're creating a tax on lower income, a tax on local banks because the rate is so high today. I still think they'd like to get a couple in.

Listen, I wouldn't argue with is the number today, you're only going to get one or two cuts in for 2024. Yeah, I think that's-- I think that's a reasonable possibility, but we've got to see the data over the next couple of months. Our sense is you'll start to see some better inflation data over the next couple of months that'll give the Fed a window.

And quite frankly, I think they'd like to see that window. When you have a funds rate that's 5 and 3/8 and you have a core PCE at 2.6-- let's say it only is to 2.6 to 2.7. It doesn't get down to 2 and 1/2. You're still very restrictive and putting pressure on parts of the economy probably unduly.

JOSH LIPTON: There are, Rick, though, given the inflation reports we've gotten here over the last few months, there has a question been raised about whether the Fed did enough, that they should have hiked more. What's your response to that?

RICK RIEDER: So I don't buy that at all. In fact, I-- in fact, I think once you get the funds rate to a certain level and we can debate is that level 4% or 5%? Once you gotten in, obviously, it's the real rate of interest, again, where inflation is. I don't think the Fed can do much on the service sector of the economy that is not terribly cyclical.

But what it does, it creates a pernicious impact on parts of the economy where we talk about small business, local banks, et cetera. And it's a question of how much do you want to create a skewed, distorted economy to try and get at something that is very difficult to get at? So I don't I don't agree with that at all. I think we'll see inflation come down over time.

And really, what the Fed should be concerned about, it's price stability. It's not a number. Price stability in the economy generally is pretty good. There are parts of it-- auto insurance, health care, health insurance, et cetera-- that are too high, but it's not because of a cyclical impulse.

So no I don't agree at all that they should have gotten more. In fact, I don't I don't think you get that much of an impact. By the way, using the balance sheet is also an effective tool that they utilize.

JULIE HYMAN: And you've also said a couple of times here, 2.6%, 2.7% is, sort of, the end rate here. And if we get price stability at 2.6, 2.7, is that going to be good enough for the Fed? Is that what you think we're looking at for the long term here?

RICK RIEDER: So I think there's a couple of things. You know, it's interesting listening to the discussion before about AI and you think about what AI is. And, by the way, you think about what corporate earnings have been so good, it's companies becoming more efficient, more productive. I think you're going to see an increase in productivity.

By the way, you talk about how companies are becoming more productive and how going forward, how much labor do you utilize, how much SG&A do you utilize in your balance sheet. The reason why corporate earnings are good is they've been able to bring down costs because they're being more efficient. I think we're going to learn a lot over the next year or two how much does that AI assimilate into the economy and allow for costs to come down.

So longer term, I think it's-- when people project where longer term inflation is going to be, there are so many factors, global trade, et cetera that factor in. I think the only thing you could do today is say, gosh, we're running a bit higher inflation. I'm an investor so what do I do? You can create income in portfolios that is extraordinary because you don't have to go out the yield curve.

You can create 6 and 1/2%, 7% yielding portfolios in fixed income, and by the way, and own equities, which are not actually interest-rate sensitive. You take the top 7, 10 companies in the S&P 500 today. They're not big borrowers to fund their business so I think you can create a really good portfolio, a really efficient portfolio in today's economy with that in mind. And then where inflation goes 12 months, 18 months from now, two years from now, I think is hard to figure out.

JOSH LIPTON: Rick, I'm just looking at the 10 year here. We're at 4, 5, 7. Near to intermediate term, Rick, where do you think we head?

RICK RIEDER: So I think by the end of the year, that number is coming down. I think the 10-year note will come lower, I think, alongside of some better inflation number closer to the Fed bringing the rate down. But I think it's in a range. And I think what you have to assume in a portfolio today, 10-year longer-term interest rates could be a bit higher for a period of time, but you're creating per the earlier comment.

Like, you don't need to go out that long. You get so much yield in the three, four, five, two, three, four, five year part of the curve, things like investment, great credit, et cetera. My sense is that 10-year rate will come down. But it certainly, if we don't get corroborative data on inflation coming down, you could spend a little bit higher from where we are today, certainly in long-end interest rates.

JULIE HYMAN: And you know, what do you think is, sort of, the level that we're going to see that 10-year yield get to?

RICK RIEDER: So I mean, I still think you're going to see the 10-year get down to 4 and 1/4%, 4% over as the year progresses alongside of what we think will be better data. But listen, I wouldn't write off that you could move a bit higher from here in the interim. Again, I'm much more focused on let's build durable portfolios with income because today the Treasury's got to issue. An awful lot of debt inflation is staying sticky or high. I just want to keep creating income or on the yield curve.

JOSH LIPTON: Rick, for fixed income investors who are listening right now, what would you avoid, Rick?

RICK RIEDER: So we've heard about long-end interest rates. I think are-- why do you need them? Usually, when you're a lender, when you're buying fixed income, when you're a lender, you usually have to go out to yield curve to take more risk to get more yield. You actually don't have to do that at all today. I don't know why. I don't think we need to do a lot there in today's environment.

The other thing that I think is extraordinary about today's dynamic, you don't need to stretch into things like weaker high yield. You don't need to stretch into weaker parts of emerging markets. You can buy quality assets. And I run an ETF called BINC where we're using a lot of high-quality assets with an average rating of high BBB and we're still able to create what's close to 7%. I just don't think in an economy that's going to moderate a bit that you need to really stretch into highly-volatile assets today.

Today, I just think clip a lot of coupon, clip a lot of yield, keep your risk in the equity market, which I still think equities are going higher. I think keep your risk in the equity market where you've got some real upside alongside of companies cutting costs, keeping margins, and throwing off a lot of ROE, a lot of return on equity. I'd keep your risk there today.

JULIE HYMAN: Yeah, Rick, I was going to ask you about that. What you were saying about risk went for equities as well. You mentioned a few moments ago that if you look at the largest companies in the S&P 500, they're throwing off a lot of cash. They have some of these characteristics you're looking for. I mean, that sounds a little FAANG-y again to me, or Magnificent Seven, or whatever you want to call it. Is that what you're talking about?

RICK RIEDER: So let's evaluate a bit and spend a minute on it. If you said today-- so if you take, I think, it's the top 12 or the top 22 companies of the S&P 500 throw off return on equity over 30%, six of them throw off return on equity over 60%, that is extraordinary.

If you can build a book value equity in that accelerated a fashion, it's pretty hard for the equity market to go up. Plus, given they're also buying back a load of their stock simultaneously so it's pretty powerful from that. So yes, I still like tech.

You evolve parts of tech where you go to there are some parts of software tangential to AI that I like quite a bit. Health care, I think you're going to continue to see tremendous innovation in health care. By the way, the energy sector, which I think is a little bit of a dip today, the energy sector is also a real free cash flow generation makes a lot of sense.

And then experiences. Airlines, some of the hotel casino. I think the world is shifting and you're seeing--

By the way, why is goods inflation negative? Actually negative in the three month six month. Moving average is negative by a service inflation higher. Things like arts and entertainment, et cetera, experiences. And I think orienting your portfolio in some of those spaces as well will continue to be well supported.

JULIE HYMAN: Yeah, we heard some of that commentary from the likes of Delta CEO along with their earnings. Rick Rieder, it's always great to see you. Thanks so much.

RICK RIEDER: Thanks for having me. Appreciate it.

JULIE HYMAN: Appreciate it.