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'Markets are over-optimistic' on rates, recession, says PGIM CEO

The Federal Reserve raised rates by 25 basis points this week, bringing the target range to 5% to 5.25%. The move was widely expected by the markets and many now believe the Fed could be heading for a pause. But investors should be "prepared for volatility" says PGIM CEO David Hunt.

"The markets are over-optimistic around where we're headed with both rates and recession," Hunt told Yahoo Finance's Brian Sozzi at the Milken Institute Global Conference. Hunt said investors are "underestimating the strength of the American economy, which actually is in very good shape." For Hunt, that means that rates are "going to have to stay higher for longer than is currently priced into the market."

Key video moments

00:00:01 What is next for the commercial real estate market

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00:00:19 Who benefits from the regional banking turmoil

00:01:01 "Markets are over-optimistic"

00:01:16 Why the U.S. economy is in good shape

Video transcript

- Well, high interest rates and regional bank turmoil has raised concerns among investors about the state of the commercial real estate market. It is something Yahoo Finance surprisingly asked David Hunt, the CEO of PGIM about at the Milken Institute Global Conference, which was just talking about. Take a listen to the conversation earlier this week.

[AUDIO LOGO]

DAVID HUNT: So I think that we will see some pressure on the commercial real estate market for sure from higher rates. And I also think actually from the banking turmoil, as I mentioned, there'll be less credit provided from that group of players and their important lenders into that market. So that will create pressure. On the other hand, the pressure that creates opportunities for non-bank lenders.

So we actually would see if you take the longer term again view of this, is that as we go through a credit cycle here that the non-bank players will be well positioned for it. And as we look at our own track record as we've gone through downturns, our credit losses have actually been very manageable, and sometimes it's not a bad thing to flush out the system a little bit.

- The consensus seems to be that the Fed is about to pause its hiking campaign, may be a good thing. Do you think the broader equity markets will be off to the races now that they might be done doing this?

DAVID HUNT: I think our view remains that at the moment the markets are overoptimistic around where we're headed with both rates and recession. And what I mean by that is that actually they're underestimating the strength of the American economy, which actually is in very good shape. The consumer is continuing to spend, early days they spend money on goods, now they're spending money on services, but the economy is actually doing pretty well. That's the good news.

The bad news is that means the Fed's going to have to do more to begin to slow aggregate demand. So our view is that rates are going to have to stay higher for longer than is currently priced into the market. And that's true both for the fixed income markets as well as the equity markets. So the latter half of this year, I think, is going to see some volatility, and we should be prepared for that.

- Our thanks to David Hunt, and of course Brian Sozzi they're.