Stephen Gallagher, Chief U.S. Economist at Société Générale, joins The Final Round to share what to expect from Fed. Chair Jerome Powell at Jackson Hole and where the U.S. economy stands.
SEANA SMITH: Steve, I'm just curious just how much focus or how much emphasis you're placing on this disconnect that we have been seeing between Wall Street and Main Street because another day here when we had the S&P and the NASDAQ at all-time highs. Yet, the econ data, I mean, you can pick apart there's some strong data points that we've gotten over the last couple of days. That durable goods number this morning being one of the better reports that we have seen. But overall, it's a pretty bleak picture, I think you can make the argument, when it comes to the economy at this point.
STEPHEN GALLAGHER: Sure, I'd say so. So, hello, and-- and thanks for having me on. So, absolutely, I mean, the Wall Street-Main Street story is-- is one I'm very much watching on both sides. I'm-- I'm watching the Fed. I'm-- I'm a Fed watcher for the firm, so I'm-- I'm trying to understand the policy, predict their policy, and-- and for the financial market. And-- and the Fed, of course, you know, they're quite aware of the Fed put and the-- and the, you know, the-- the support they're providing to the equity market and that it's an unintended consequence.
And-- and they're watching the unemployment rate. They're watching rising bankruptcies. They're watching the-- the risk of defaults, the-- the potential that it has to-- to have another wave of a down leg for the economy going forward. But with the unemployment rate so high and-- and the-- the economy struggling to get back to where it was and the COVID risk not out of the picture yet, the Fed has no choice but to be extremely friendly in this environment.
SEANA SMITH: And, Stephen, when you talk about that, that's interesting, because just last hour, our colleague Brian Cheung, he spoke with Kansas City Fed President Esther George earlier. And he was asking her just about some of those risks associated with monetary accommodation and then, of course, a question about how the Fed is going to address a rebound when we see it. We might get more commentary on that from Jay Powell tomorrow, but I'm just curious just what you're looking for and how you think the Fed is going to address that.
STEPHEN GALLAGHER: Sure, I mean, that's definitely the question of the day. Or not just today, but for many weeks to come. But, you know, we're-- we're looking for GDP in the third quarter to be a positive 25%. So how does the market change their Fed expectations when the economy jumps up that large? Now, that's not a full recovery. We've-- we've been down 30-some percent. The unemployment rate remains, you know, 9, 10-ish percent. It's 10-- 10.2% right now.
So it's-- it's-- even though you're getting some very strong growth numbers, an 11% [INAUDIBLE] global [INAUDIBLE] is one of those really strong indications we have yet to recover. And so the Fed has no choice but to be to support the economy. Their risk is not the equity market. Their risk is inflation might get out of control. Well, there's real no-- no sign that inflation is getting out of control, so they're going to continue to be very accommodative, very supportive.
Despite even an initial up leg in the economy, a third quarter number being very strong, they're going to watch those employment numbers, and-- and they're going to remain very friendly until inflation rises very significantly from where we are. And that's what we're going to hear from Powell tomorrow. You know, when does the Fed start tightening policies with inflation increasing? And the message I think we're going to get from him is, the Fed's going to remain dovish certainly through the first stages of inflation gains.
ANDY SERWER: Stephen, as the chief economist for a French bank, I know you cover the US, but does that change your perspective? And what's going on with Europe in sort of a global macro view, and how does that tie into your view here?
STEPHEN GALLAGHER: So I would say it being the US economist of a French bank doesn't change my view on the US economy. It does try to make me push changes in the European economy outlook, unsuccessfully. But, you know-- but it-- I would say, you know, Europe is watching the US very closely, of course. They're watching the Fed. They're gaining a lot of support as well from the Fed. They're watching the equity markets, just as you are, and-- and wondering how it's-- how far-- much further it can go.
But I would say the ECB policy is very much following the Fed. And right now, we're seeing the-- the euro increasing and the dollar falling, and-- and Europeans are watching that much more than, say, US counterparts are. And-- and they're concerned that maybe there's some inflationary aspects of that, or maybe it's a-- a reason to be more invested in European equities as opposed to US equities. But for now, they're still very much focusing on US financial products.
RICK NEWMAN: Hey, Stephen, Rick Newman here. You may have heard at the top of the hour Andy bringing up the idea that this was close to a mania, and I was asking, well, did the Fed create this mania and-- and can the Fed control this mania if that's what it comes to? What do you think about that? If-- if this-- if this really is a bubble, can the Fed control it?
And I think back to the, you know, the housing bubble, for example. I mean, the Fed wasn't alone in creating the housing bubble. There were a lot of factors there. But the Fed could not control it once it began, and the best it could do was try to mitigate the damage, which was obviously considerable. What about this time around?
STEPHEN GALLAGHER: I'm afraid history repeats itself. So I-- I think you're-- you know, I'm not sure the Fed's creating it, or certainly not a single creator of it. They're-- they're a contributor to the bubble-- the the housing bubble before. The tech bubble back in 1999, 2000, the Fed was definitely a contributor to that. They can't seem to help it. The-- but it's an unintended consequence. And they're focusing on the real economy, and that's their mandate.
And they're going to support employment until inflation becomes a risk, and the-- the financial market is just a corollary of that. It just-- you know, it reacts to that. And right now, it's reacting very positively. We do have to be worried about the downside if the bubble bursts. But, you know, they can't predict a bubble. They can't predict the timing if it is a bubble. And-- and therefore, the-- they really can't react to it on a policy basis.
AKIKO FUJITA: Stephen, I'm curious what you make of all this talk about coverage inflation targeting and-- and whether the Fed is going to let inflation overshoot. I mean, you know, we'll have to listen to the address tomorrow, but-- but to me, that sort of raises questions about the credibility of a 2% target.
STEPHEN GALLAGHER: Absolutely. So it's a-- you know, so the-- the big change that we're anticipating on the Federal Reserve is that they're going to target an inflation rate of 2% over time, and we have no idea what that time span may be. It's-- it's not just a year or two. It's-- it's many multiple years. But the idea being that if the Fed-- if inflation undershoots the 2% target for a while, then they can tolerate inflation overshooting for a while without rate increases.
Now when we look at 2015, the Fed tapered and started to talk about rate increases and letting their portfolio roll off as inflation reached 2%. Well, had they looked at inflation average targets over the time, they'd have realized that were-- they were far away from achieving an average inflation rate of 2%, and they would not have been hiking rates as early as they did. So in my mind, this whole inflation averaging in a period where we're struggling to get a 2% inflation rate means the Fed's even going to be more dovish going forward.
SEANA SMITH: All right, Stephen Gallagher, Chief US Economist at Société. And always great to have you on the show. Thanks so much for taking-- making the time to join us today.