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Barclays Chief U.S. Economist on what to expect from the Federal Reserve at Jackson Hole

Michael Gapen, Barclays Chief U.S. Economist, joined The Final Round to discuss what he's expecting out of the Jackson Hole Economic Symposium conference this week and what it will signal for the greater economic recovery.

Video Transcript

MYLES UDLAND: Michael, so let's start with the Jackson Hole meeting and, I guess, your expectations on this being an agenda-setter, as it often is. I mean, is this-- and the Fed's been doing this review. Maybe they'll do average inflation targeting or something. But is this still kind of emergency settings for the Fed as everyone gets together here?

MICHAEL GAPEN: Actually, I do think Powell will open the conference by giving kind of the state of play on the framework review. I think you have that exactly right. The Fed kind of hinted at this last week after the release of its July minutes. So I do think there'll be an opening set of remarks by the chair that reviews what the Fed has been doing for the last year on this listening tour, and kind of walk as close to-- as he can to telling you where they are and that they're close to a conclusion.

He can't make any formal announcement, in my view, because it's a decision that has to be taken through a vote on the committee to change the target, if you will, in terms of what the Fed is trying to achieve in terms of inflation. So we can't go all the way and say, hey, we've decided we're going to move to average inflation targeting. But I think he can walk up pretty close to that and lay the ground for that official announcement in September.

MYLES UDLAND: And so I think the inflation target has gotten a lot of play in the last couple of months, is maybe a big takeaway from this review. So has yield-curve control. I'm imagining that you've had many clients asking about this. And sort of as you look at that as a potential tool for the Fed to use, does it seem-- I mean, I know they've been kind of-- moved away from it. They've tried to downplay that recently.

But does it seem like something that could be coming to the Fed's toolkit? Given that they've said rates are going to be zero for a couple years here, how can they sort of control rates the way that I think they'd like to?

MICHAEL GAPEN: Right, I think it stays in the toolkit. Part of the framework review is your objectives. The other part is your available tools to reach those objectives.

And I do think yield-curve control is one of those tools in the toolkit. The Fed's not going to throw it away and say we're never going to use it. It's just saying right now, costs and benefits don't appear aligned.

So it could become important in the future if the Fed is shifting to inflation averaging and it's saying it wants to generate a modest overshoot of 2% to make up for time when it was running below 2%. It may want to prevent market expectations for hikes to build. So if the yield curve is rising, indicating the market is suggesting Fed hikes are coming and the Fed doesn't want that to happen, then you might see yield-curve control brought in, where the Fed would effectively cap those yields and reinforce its guidance about wanting an overshoot of inflation.

So right now, the Fed doesn't really need it. Market's not pricing a hike for the foreseeable future. But if the economy for some reason picks up, if there's a vaccine and there's upside to the economy, the Fed may bring in yield-curve control at a later date.

JARED BLIKRE: Good to see you, Michael. My question is about all the measures that the Fed enacted after the Great Financial Crisis. We got the dot plot. We got more transparency. And a lot of the reports are being released quicker.

Any chance of a rollback of some of these? Because, I think, reading between the lines, Jay Paul believes at least the dot plot and some of these projections have just given the markets either a false sense of confidence or the market has been too keen to jump on what the Fed thinks of the economic reports rather than the reports themselves?

MICHAEL GAPEN: I think once these are introduced, it's pretty hard to roll those back. I don't have an expectation that the Fed's going to toss out the dot plot or remove its projections. I think we have what we have. They're not perfect tools. There are many times when the medians of the dot plot and the projections line up to a coherent story. There are other times when it doesn't.

So I know these are flawed communication tools. I don't expect the Fed will be changing that. I think it's what we have to work with right now, for better or worse.

SEANA SMITH: Hey, Michael, I want to get your thoughts just on the labor market, because I think the first couple of weeks after the coronavirus pandemic hit, the thought here was that a lot of these temporary layoffs were only going to be temporary. And as we see the economic recovery stall a little bit, I think the big fear out there now is that more of these temporary layoffs are going to turn into permanent layoffs.

So what's your reading on that, the labor market? And then how are you incorporating that into your forecast at this point?

MICHAEL GAPEN: Right now, the claims data is suggesting that the labor market has maintained its momentum into August. Continuing claims are about 2 million lower than they were during the July survey week. So it's suggestive of another week of solid employment.

But we still have a long way to go. To your point, the unemployment rate today is still above where it was in the peak in '08, '09. So we're getting some very mammoth job growth numbers in recent months. It feels like that's going to continue, at least in August. But we have a long way to go.

And so I think the answer to your question is we're doing the best that we can to make a subjective judgment about how many of these jobs in the face-to-face service sector may not ultimately come back. And therefore, how it manifests itself in a forecast is to say, well, that's capital and labor that's going to, in essence, get destroyed.

And it needs to get rebalanced into other sectors. That takes time, several years or more. It'll likely weigh on productivity growth and potential growth in the meantime. So I do think we're all assuming at least some of these jobs don't come back. And that's something that will weigh on the outlook over time.

We need to keep employment growing at a very solid pace. I think phase four stimulus would be helpful for that. So that's the next near-term key in order, I think, to bridge the gap to when the economy can grow more organically on its own.

MYLES UDLAND: All right, Michael Gapen is the chief US economist at Barclays. Always great to get your thoughts. Thanks so much for joining the program, Michael.

MICHAEL GAPEN: Thank you.