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Fed Chair Powell expected to get ‘a grip on communication’ with markets: Economist

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Robertson Stephens Wealth Management Chief Economist Jeanette Garretty and Wells Fargo Senior Macro Strategist Zach Griffiths join Yahoo Finance Live to discuss what they are looking forward to hearing during today's Fed press conference, how the stock market is reacting in the wake of the Fed's decision, and the impact of COVID-19 on the labor market.

Video Transcript

- --bring in our next guest, Jeanette Garretty from Robertson Stephens Wealth management, Chief Economist there, and Zach Griffiths, Wells Fargo, Senior Macro Strategist. Thank you both for being here today on decision day. I want to start with you, Jeanette. What are you most wanting to hear from Powell at the conference?

JEANETTE GARRETTY: [LAUGHS]

I am most wanting to hear him getting a grip on the communication that's being delivered to the market. And I feel bad saying that. All the previous speakers here have been talking a great deal about how this is being communicated. And the reason I feel bad is because I think they think they have been careful about communicating, as a number of people have said.

There's no surprises in this statement. Many of these things were signaled to the markets in December. And in the last two weeks, the market just went off into the wild blue yonder, worrying about everything, including a 50-basis-point increase in March, which I don't think was ever in the cards. And the sense was that somehow this decision on monetary policy was being done in absence of looking at the economic conditions.

And when I look at this statement today, there's a great deal of emphasis on the uncertainty of the economic conditions. I do think they're going to continue to look at this. They desperately want a soft landing. It's going to be terribly hard to do, given how much uncertainty is there. So I think Chairman Powell in the press conference needs to take back control of the narrative from the emotions that have been running in the markets in the last few weeks.

- Yeah. He's definitely walking the tightrope there. Zach, we didn't get any specific timeline as to when the Fed will start to reduce its bond holdings. Were you hoping for some clarity there? Or do you think the markets can sort of regain their footing without knowing for sure?

ZACH GRIFFITHS: Yeah. It seems like there was some concern that they could be a bit more specific with respect to balance sheet policy, which I think would indicate the runoff beginning sooner. And they leave it pretty ambiguous, just saying that it will start after rate hikes. I think everyone expected that going in. So they're definitely preserving optionality.

I think Adam pointed out at the start of the segment here that Chairman Powell said something like two, three, maybe even four meetings to sort through those details. So I'd say it's a discussion they're going to continue having. I think it's going to have a big impact on the market, and that's definitely something that I'm focused on at the press conference. I'm sure he'll get a question on it.

I'd imagine he'll try to be as vague as possible. But any indication of how he's leaning with respect to policy, they've made it clear they're going to be more aggressive this time around than they were last time. But the economy is in a much different place, so that makes sense from our standpoint. And we look for them to announce the runoff in September, having it begin in October of this year.

ADAM SHAPIRO: Jeanette, if Zach is correct, and the runoff begins in October of this year, will that add volatility as we get toward the end of the year? Or would that be a stabilizing situation?

JEANETTE GARRETTY: I think probably it adds some volatility, if only because nobody is really sure how that is going to play out, and how is it going to be executed, and what is really going to be the fundamental impact on the economy? This is all sort of new stuff. And I think that's why in the previous time, in 2018, when they talked about it, the reaction was we don't really know, so we're going to assume the worst. They may do the same thing at that point.

- Zach, I want to ask you, what data points do you think the Fed is looking most closely at at this point? And then what did they say about labor conditions?

ZACH GRIFFITHS: I was going to say. I think they're really focused on the labor market. And their tone has changed quite a bit lately, indicating that we're much closer to maximum employment over the past couple of months than they had been indicating. And, of course, we've made substantial further progress on the labor market front.

So we're looking at a broad array of indicators. It's going to be interesting over the next couple of months seeing how Omicron has impacted the labor market. We think that whatever impact we see in the data near-term is going to be just that, a near-term implication and not-- it doesn't really change our outlook for the labor market.

You have an unemployment rate below 4%, and you have signals everywhere that slack in the labor market has evaporated or is non-existent at this point. So I think that's something that the Fed is clearly focused on when they're well above their inflation goal. We have headline CPI above 7%. That's certainly well above where I think they'd like it to be.

Now, you have the supply chain issues making it difficult for them to use their policy tools to address it, but we're already starting to see them look to remove policy. I'd say the statement today is a green light for a March hike. I agree that 50 basis points is off the table, but they're clearly responding. And I'd say to the degree that they tighten even more quickly than the market expects, that's going to come down to what happens with the labor market.

- Jeanette, for regular folks hearing this and hearing all this talk about interest rates going up in March, talk to us about the relationship between those interest rates and perhaps someone looking to buy a home, because they're not directly related, although it could certainly impact what happens with mortgage rates.

JEANETTE GARRETTY: It can. It will. But the direct relationship-- you're quite right. The direct relationship is not there. I think this is often a-- something of a mystery to the average person.

Nevertheless, we heard Chairman Powell in testimony to Congress say that he thought that the usual nine to 12 months of transmission of these kind of actions into the real economy comes much quicker. He gave six months as the element there. So it's primarily going to come to the average person in terms of other interest rates. That will be where they will see it.

I think the other effect is to the extent that there is an impact on raising borrowing costs for companies, does that impact their hiring plans, their spending plans? And ultimately, does that show up in some actions that the average person can experience? I do want to emphasize, they're very worried about-- they're very focused on the labor market.

There's something that's left out here a little bit, which is they do want to get that labor force expanded. They do want people to come back into the labor force. Raising interest rates aggressively potentially is a negative for that. So I think that's some of the tightrope that they're walking on.

ADAM SHAPIRO: Zach, you talked about vagueness when the Fed speaks. And yet Jerome Powell wrote papers before he became chair about the need for the Fed to be more transparent and direct in its communications. Will-- do you expect him to be that at the press conference in a minute or two, truly signaling and giving us timelines for what's going to happen, or is he going to play the old cat-and-mouse game of being vague?

ZACH GRIFFITHS: I think there's going to be some more of the cat and mouse. And it really comes down to them wanting to preserve optionality and have the ability to, I'd say, shift in a more dovish direction, if they need to. Over the past couple of months, it's really been the hawkish party, and maybe it comes down to that huge inflation print in October really waking people up.

But at the end of the day, they do want to have that optionality. I think having that vagueness gives them that ability. And if he were to lay out a fairly specific timeline now for four or five, six months down the range, down the road from here, and the economy were to change significantly, if the virus were to change significantly, then that creates a very difficult communication problem for them. And that's something they want to avoid.