What to expect from this week's Fed meeting

Emily Weis, Macro Strategist at State Street, joined Yahoo Finance Live to discuss what she's expecting from the Fed this week.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to stick with the markets now and welcome in Emily Weis, macro strategist at State Street. Emily, thanks for being with us. I actually want to start with your expectations for what we might hear from the Federal Reserve this week. Because since the last Fed policy meeting in mid-September, we've had more evidence that inflation is going to be probably here to stay. It's not really going to be transient. And we've also gotten a tighter labor market. So what are your expectations for this Fed meeting?

EMILY WEIS: That is certainly the main event of the week. And it's especially important, given the context that we've seen as of late with increasing evidence that inflation still might be transitory, but definitely will be transitory for longer, as a lot more of these supply chain issues and inflation shocks have continued to persist, even as we rebound from the depths of the COVID-19 pandemic. So really, this week, we're expecting the Fed to announce its taper decision. And that certainly at this point is pretty well projected by the Fed. They haven't been shy about communicating this eventual change in policy that would be taking place.

So we are expecting that they'll announce a start-- start the roll-off at around $15 billion a month, a combination of both the US treasuries and the NBS purchases. And then we'll look for the press conference for any additional information on how they're looking at not only the taper process, but what comes next. As we know, the markets are always forward looking, and we're already starting to think about when those eventual rate hikes could be coming down the pipeline, if this inflation does prove to not be as transitory as the Fed thinks.

KARINA MITCHELL: And so for right now, equities markets are still delivering, right, despite supply chain shortages. But tapering will come, and then rate hikes will follow into next year. Do we see a shift, then, from this sort of mid to late cycle, if you will? And then where do you start looking to sort of put your money in that case? You are not very bullish on emerging markets. Is that right?

EMILY WEIS: Yeah, that's correct. Certainly, when we look at the path for risk assets over the next year, it's a lot steeper of a hill to climb to get that sort of outperformance that we might have seen. During this rebound of the last year, it's really been the case where risk just always tends to trend higher. Certainly a lot of the optimism around rebounding growth, central banks providing this excess amounts of liquidity, and then also just having the support from fiscal stimulus globally, that's all combined for a decent appetite for risk.

Those periods, all three of those, tend to be sort of peaking right about now. And so we're looking for some of an unwind of that excess liquidity and stimulus. And certainly, the good news is we're at a point where that excessive emergency government policy isn't needed. And that's why the Fed taper announcement hasn't had that big of an impact in terms of equity market performance. But when we start to look a year or two years out, certainly, it's going to be a harder wall to climb for stocks to continue to outperform the way they have.

And certainly, on the emerging market side, both on equities and fixed income, FX, we haven't seen the same sort of returns as of late. And we expect that to still be a difficult momentum going forward, as, really, the US story and things like that are just more powerful right now than the growth story in the emerging market complex.

ALEXIS CHRISTOFOROUS: What is your exposure there at State Street to cryptocurrencies? We've talked a lot about it today on our show. And Ethereum is now at an all-time high. How exposed are you? And how are you using cryptocurrency? Are you using it as a hedge against inflation?

EMILY WEIS: So, currently, right now, I sit on an FX trading floor. And that only encompasses the major currencies that are currently used by governments. But certainly at State Street, we've been looking a lot at the digital space. And we actually have a new development of our business that is primarily looking at this called State Street Digital.

So I think we fall in line broadly with other banks that are also turning to crypto and realizing this might be a bit more persistent of a trend than we initially expected and certainly are looking to provide as much context around those things as we can. I know certainly as a macro strategist, it's been increasingly interesting to figure out where crypto falls in a world where, normally, we've encountered just the asset classes of equities, fixed income, and FX. So, definitely a lot of exciting frontiers there.

KARINA MITCHELL: I'm really interested for your take on everyone's, you know, ensconced in the middle of COP26 right now. Decarbonization seems to be going mainstream. Where do you see investment in that space?

EMILY WEIS: So, in my world, the biggest impact of this sort of-- of the changes that are coming up in the next few years in the sort of decarbonization space and the change towards more renewable energy sources have actually been some of the debate around inflation that we're seeing right now, and certainly, the rise in commodity prices that was mentioned at the top of the hour here, where a lot of the impacts of this change are actually materializing in some short-term pain points.

So even though the more medium term and longer term trajectories for the net positive-- and we see investors allocating towards places like renewable energy and decarbonization processes. And that is all immensely positive, given the shift to ESG focus.

A lot of those pain points are now materializing in our economic forecasts in terms of the underinvestment in things like oil and in different commodity production and how that ends up being a near-term sort of pressure point, essentially, as it's the underinvestment is materializing in the lack of supply. So that's more been our focus for the immediate term, as we focus on the next few months ahead, but certainly more optimistic about the more medium to long term trends.

ALEXIS CHRISTOFOROUS: All right, Emily Weis of State Street, thanks for being with us today.