Biden Fed picks provide important 'continuity' right now, economist explains
Grant Thornton Chief Economist Diane Swonk joins Yahoo Finance to break down the implications of President Biden's Fed nominations.
Video Transcript
KARINA CONTRERAS: We will stay on this news about the Fed pick by the president and bring in our next guest, Diane Swonk, Ron Thornton chief economist. Thank you so much for your time today. Quickly just want to get your reaction to the news. And then how important was it for these picks to be made ahead of the next Fed meeting?
DIANE SWONK: Well, I think there's a couple of things. One is continuity at a time of such extraordinary uncertainty is certainly welcome news. We have extraordinary uncertainty because we're pivoting from the phase of the cycle where the Fed had been shoring up the recovery from the pandemic-induced recession. And as it had did, it did avoid a meltdown in financial markets.
But now we've got very easy financial market conditions. And we're dealing with inflation. And having to pivot to dealing with inflation and tamp it down without derailing the recovery, that's a very hard thing to pull off. We've not seen the Fed actually chase inflation down since the early 1980s. It's had preempted non-existent inflation.
And having Chair Powell with Lael Brainard, Governor Brainard as the vice chair I think is a very dynamic duo at this stage of the game because they're both very humble. And they have a lot of humility, especially Powell, about the ability of the Fed to forecast into the future. And he's shown a willingness to pivot and change course and even reverse things he thought he did wrong during the course of his tenure.
And I think that's an important thing to do as we get into the December meeting. Not only have we not seen the minutes to the last meeting, which I think you'll see a major shift in that, where you see the Fed talking about accelerating their tapering. They left the door wide open so that they could slow down the pace of their purchases of bond purchases and mortgage backed security purchases pretty rapidly. They want to get some space between ending that process and liftoff in rates. And I think we're looking now at a liftoff in rates in mid 2022.
SEANA SMITH: Diane, there's lots of anticipation in terms of what we were going to hear from President Biden. And I want to play a quick sound bite as to why when he was discussing why he picked Jay Powell for a second term. Let's take a listen.
JOE BIDEN: When our country was hemorrhaging jobs last year and there was panic in our financial markets, Jay's steady and decisive leadership helped to stabilize markets and put our economy on track to a robust recovery. Jay is a believer in the benefits of what economists call maximum employment. That's an economy where companies have to compete to attract workers instead of workers competing with each other for jobs, where American workers get steady wage increases after decades of stagnation, and where the benefits of economic growth are broadly shared by everyone in the country.
SEANA SMITH: Jay Powell has certainly done a lot to get the economic recovery on-track. But there's still a lot of work that needs to be done. You mentioned the fact that you're expecting to see, when we get the Fed minutes from the latest meeting, a major shift just in terms of what the Fed is now discussing. What would you say, Diane, is the biggest challenge facing Powell right now as we enter into the new year?
DIANE SWONK: Well, the problem is the pandemic is still ongoing. I mean, we see the cases surge in Austria and in Germany in ways they've not seen. The lockdowns and the backlash to lockdowns in Austria that we saw over the weekend, these are things that are still concerning because they could further disrupt supply chains, which have been one of the aspects of inflation, along with the demand surge.
And so this is a hard time to navigate policy. He's very cognizant of the fact that the Fed is the central bank to the world. And he wants to be able to get that messaging right of saying, I want to be able to get to a place where people who want a job can get a job, and we're not letting inflation get untethered and get to the place where it gets entrenched in the US economy.
That's a very hard kind of thing to engineer. Like I said, this is the first time the Fed has chased inflation down since the early 1980s. That said, between Brainard and Powell, I think you've got a good balance of people who both understand that inflation is also one of the things that hurts those who can afford it least the most. They're both very cognizant and very sensitive to the issues of inequality.
And even though the Fed doesn't have all the tools to deal with that, that challenge of trying to deal with getting enough jobs back so that we feel like we really are to that place of full and inclusive employment, at the same time not wanting to snuff out the wage gains that those low-wage workers have finally gotten with too much inflation. It's a very, very hard thing to engineer.
And I think you really want someone who's going to be prudent. The Fed has said, Jay has said he will be patient but not hesitate to raise rates. And I think what his job will be now is to be prudent in rate hikes without getting the rest of the Fed to panic. And central bankers are hardwired to actually think about inflation first. And I think having Lael Brainard and Powell at the helm of the Fed is really important in sort of a bit of a pushback, acknowledging that we need to deal with inflation without overshooting. Really hard to do.
ADAM SHAPIRO: Diane, it's possible for equities to rise when interest rates rise. And I was curious. We're watching the 10-year. I realize it's only one metric. But the yield's going up on the 10-year. Does that make Jay Powell's job easier and give him some breathing room? Because liftoff, as they call it, probably won't happen until sometime after June, if it happens next year.
DIANE SWONK: Yeah. Well, there's no question that-- I mean, you could have knocked me over with a feather when we got 52 basis points on the 10-year and we got $1 trillion into debt. That was really pretty spectacular in 2020. So seeing the 10-year come back up is sort of more normalizing. We should see that.
And I think people are starting to get the message that the Fed is going to accelerate their tapering of asset purchases, which should allow those rates to go a little higher. It doesn't do all of the job for the Federal Reserve. And I think the Fed is still going to have to raise rates. But I think it's an important issue.
We're starting to see financial markets very different. Although, yes, we have seen in the past financial markets. This is how much of a high-wire act this is. They've not reacted overwhelmingly to rate hikes. That's because the Fed has preempted a non-existent inflation. It's not been chasing down an inflation that's there with an uncertainty about how entrenched it will become.
And I think that's where the difference is this time. And it's really important that both Brainard and Powell also are very cognizant of the law of unintended consequences and financial market stability more broadly. They want to message this. They want to be able to message their pivot without an overreaction by some of their colleagues. And I think that's the hard part of where they're at today because this is something financial markets don't have any muscle memory of because there is no precedence to 2021, except for 2021.
KARINA CONTRERAS: Navigating fresh waters. Diane Swonk, thank you so much for your time, Ron Thornton chief economist.
