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Expect lower growth expectations and higher inflation forecast from the Fed: Strategist

Brian Nick, Nuveen Chief Investment Strategist joins the Yahoo Finance Live panel with the latest market action.

Video Transcript

AKIKO FUJITA: First, though, we are kicking off this hour with all eyes on the Fed and that FOMC decision. We've been watching bond yields very closely, Zack. Trading pretty flat right now as investors look for more clarity, more details on a potential tapering later this year when Fed Chair Jay Powell kicks off that press conference at 2:30 PM Eastern.

Let's bring in our first guest for the hour. We've got Brian Nick, Nuveen Chief Investment Strategist joining us today. Brian, always good to talk to you. What are you going to be watching when the Fed chair takes the podium?

BRIAN NICK: Well, I think in advance of that we're going to get the new forecasts for growth, inflation, and, I think most importantly, interest rates from the FOMC. What I'll be watching there is does the dot plot paint a more hawkish picture of where the median FOMC member would like monetary policy to go in 2022 and 2023? We had a bit of a hawkish shift at the June meeting. That got markets' attention. I think markets started to become more sensitive, at least in the immediate term, that the Fed was leaning into maybe committing a hawkish policy error. If we get a similar reaction to this meeting, I wouldn't be shocked because I do expect the dots to show more members favoring more rate hikes in 2022, which is not what the market's currently priced in.

So what Powell may have to do is what he tried to do in June, which sort of talked down the importance of the dot plot, maybe share some of his own thinking and I think the thinking of the more kind of Fed core leadership, which is probably to be a bit more patient, i.e. dovish, as we head into next year.

ZACK GUZMAN: Yeah. I mean, they're still waiting to see if he's going to be reinstated as Fed chair when President Biden makes that official call. So I wonder if that's going to be maybe playing into anything we hear today.

But you're right. I mean, when we talk about maybe some of the economic data we've seen heading into this decision, we have seen inflation-- though it is running above kind of where the target is. It had been cooling relative to expectations. I wonder how much that also maybe influences the thinking as they wrap this up today.

BRIAN NICK: Yeah, this is really interesting because I've been making the same point that you just made, which is that inflation is decelerating. The month-on-month numbers have been much softer in the last few months. But the Fed is probably going to be showing a higher median forecast for inflation, at least for 2021 and perhaps for 2022. And all that's going to be doing is basically baking in the effect-- the cumulative effect of all the inflation we've seen since the June meeting.

So while the most recent month was quite soft, softer than expected, the Fed's probably going to be revising up their inflation forecast for this year and perhaps for next year as well. So there's two things that are sort of happening at the same time, which is the FOMC may be getting more concerned about inflation. Where inflation is ultimately going to settle in 2022-- is it going to be 2%, 2 and 1/2%, 3%? That will determine whether or not they're going to be interested in tightening policy sooner than the market expects.

But you're right. The actual inflation numbers we've seen-- because a lot of the effects of the big sort of goods price inflation, that demand shock that we got in March, April and May, are starting to wear off.

So I expect lower growth expectations, higher inflation forecasts, and a more hawkish dot plot. And that may-- even if it's not really what the Fed intends to signal to the markets, that may be how the markets take it. And again, it's Jay Powell's job to sort of talk that down even as he tries to parry questions about whether he's going to be reappointed, which I don't think he's in a position to comment on at this point.

But I do think the makeup of the FOMC will be more dovish next year than it is right now because President Biden's going to have a chance to appoint a couple of new governors at least, even if he chooses to reappoint Powell. And those governors are likely to be more in favor of a dovish approach to monetary policy than the people they replace.

AKIKO FUJITA: Brian, what does that ultimately mean for strategy? You say investors have been pretty cautious, leaving a lot of money on the sidelines. Should they be putting that money to work now?

BRIAN NICK: We think so, and I don't think it's really about buying the dips from the Evergrande news this week, although that seems to be what's going on in the markets, at least today. I think the policy backdrop, the overall macro backdrop is still very supportive of risk assets. We don't know how much more credit spreads will continue to compress. They're already sort of in late-cycle mode.

But I do think that equity valuations look reasonable to us. They've been coming down gently all year, coming down a bit more rapidly in September. And I think investors who want to stay in the game, they want to give themselves a shot for that 3%, 4%, 5%, 6% return target for their overall portfolio are going to need to be back in the equity markets, if they're not already.

We know that the outflows from stocks remain highly negative on a cumulative basis since the start of the pandemic. So there's a lot of people who have not gotten back in. Instead, they're putting money into fixed income. They're putting money into cash, which works for part of the portfolio. If you want to grow it, you still need to be in stocks, even if the trajectory of the market over the next 6 to 18 months is going to be flatter than it has been over the last 18.

AKIKO FUJITA: OK, well, we will be watching when that statement comes out this afternoon. And, of course, a reminder to our viewers, we're going to bring you that press conference live at 2:30 PM Eastern.

Brian Nick, Nuveen chief investment strategist, good to talk to you today.