The Fed is clearly helping but not enough without fiscal boost: Zandi

Moody's Analytics' Mark Zandi joins Yahoo Finance's On the Move to talk about what he is seeing in the economy right now.

Video Transcript

JULIE HYMAN: I want to get straight to that economic data that we got earlier today. This was for the month of July. Consumer spending up 1.9%. It does represent a slowdown in momentum from May and June. Personal incomes up 0.4%.

Let's break all this down, talk about what it means with Mark Zandi. He is joining us on the phone. He is Moody's Analytics' chief economist. And he's joining us from West Chester, Pennsylvania.

Mark, it's good to talk to you. So as we get these numbers, it seems like this confirms what we have been seeing, which is sort of a moderating of the rebound in economic activity. Is that how you read it?

MARK ZANDI: Yeah, I think that's right. We got a lot of statistics this morning-- the spending data, the consumer spending data that you mentioned-- that feels pretty good. Consumers are reengaging. But we did get data on trade. And we saw a wide-- widening in the trade gap, which is a negative. And we got another read on consumer sentiment, which remains very low.

So, I mean, there's a lot of crosscurrents here, positives and negatives. And if you net it all out, it looks like an economy that is growing. It's moving forward. But it's not going anywhere fast.

And actually, I don't think it's going to go anywhere fast until we've got-- have some kind of resolution of this pandemic. It's going to be two steps forward, one step back. And that's what we're getting.

JARED BLIKRE: Hi Mark, Jared Blikre here. I want to get your take on longer-term rates. We had the 10-year, big break to the upside yesterday. I think it said about 75 basis points now. 30-year is at a two-month high. What's your take on what's happening in the yield curve right now?

MARK ZANDI: Well, I think a couple of things. One, the better economy. I mean, it feels like we're moving forward. And I think some of the flight to quality into long-term interest rates is coming out as people are feeling a bit more comfortable that we're going to get to the other side of this pandemic. So I think that's part of it.

Of course, yesterday, we got Jay Powell, the chair of the Fed, gave a speech, announced a substantive change in the framework for conducting monetary policy, and I think gave investors a sense that the Fed's going to be very aggressive in keeping short rates low for a long period of time, and also allowing for higher rates of inflation than has been the case historically. And so I think that also drove up 10-year yields. Inflation expectations rose. And that got put into 10-year yields.

So it's a combination of still improving sentiment around the economy that goes to real yields, and then the Fed actions, which pushed up inflation expectations. So both of things probably conspired to push up long-term rates.

JULIE HYMAN: So Mark, let's talk about fiscal and monetary policy for a moment sort of together, because first of all, do you think that what the Fed is doing is actually sort of trickling down and helping job creation, for example? We've sort of stopped talking about the fiscal stimulus, right, because they couldn't come to an agreement. But does that still need to happen in order for the economy to continue or even improve?

MARK ZANDI: Well, what the Fed is doing is clearly helping. I mean, that is critical to keeping the economy together as well as it's been kept together. I mean, you can see that most vividly in the housing market. I mean, housing, that's a V-shaped recovery. Home sales are back. House price growth is strong.

People are buying homes. Housing construction is strong. And that's creating jobs. So that's all positive.

Obviously, the Fed's actions are key to what's going on in the stock market. That's the fundamental reason why stock prices have come back. It's also very important to that consumer spending we talked about, and then clearly, that supports [AUDIO OUT] is very, very important.

But in my view, it's not enough. I do think fiscal policymakers, the Congress, the administration do need to come together, hopefully by the end of September, pass a a piece of legislation to provide more support to the economy. I think if they don't, then I do think the risk is that the economy will start backsliding.

As I said, it's moving forward, but very-- it's a very gingerly move forward, two steps forward, one step back. If we don't get some support-- additional support from fiscal policy makers, it's going to be two steps back and one step forward. So I think they need to act.

JARED BLIKRE: Yeah, I hear you on, don't want to backslide. And specifically thinking about the job market, because we get the non-farm payrolls report for August next week, and I think the headline number is supposed to come in at about a million and a half jobs. But are you seeing signs or do you have concerns that we're going to see another round of layoffs, maybe at the white collar level, that really hasn't been priced in yet?

MARK ZANDI: Yeah, that's a good point. I mean, we-- obviously, we're still seeing very high rates of layoffs at the current point in time. We got the read on unemployment insurance claims. We're getting close to 1.5 million per week. That is a lot of layoffs. And I think that's largely in the industries that are kind of on the front lines of the pandemic, the ones that are obviously been hit hard here-- travel and retail and transportation, those kinds of industries.

But I do think you know the economy is a long way from normal, where we've got a long way to go to get back to where we were pre-pandemic. And the longer this goes on, we are going to see the problems bleed out into other parts of the economy. And we'll start to see layoffs, blue-- white-collar layoffs, layoffs among higher skilled, educated workers, that so far have been able to navigate through this pretty well.

But that's going to change. And that is why it is so critical for lawmakers to get it together, provide that support so we don't backslide. Because if we do, then this pandemic is going to be a financial disaster for a lot more people.

JULIE HYMAN: Mark, finally, I do want to ask about the election, because we've been talking a lot about it and the implications for the economy. At the same time, I do want to acknowledge that last time in 2016, there were few, more to the point, market forecasters who thought that stocks would do as well as they did in the wake of a Donald Trump victory, or perhaps the economy as well. So I'm curious, as you go into this time around, how you're checking yourself, for lack of a better term, when it comes to trying to make predictions.

MARK ZANDI: Well, you make a good point. I think the key to-- I think it's important to recognize that under the Trump administration, the economy has grown roughly-- abstracting from the pandemic, let's just abstract from that-- the economy has grown by almost exactly the same pace that it did during the Obama administration. So just take the three years during Trump administration pre-pandemic, look at real GDP growth, do the same thing in the last three years of the Obama administration, it's the same thing.

But the thing that the Trump administration did was pass these massive tax cuts to businesses and to households that was all deficit financed, which is added to our deficit and debt. So that juiced things up. And that was particularly difficult to-- you couldn't have known that that was going to be the result of that election and his policies.

So my sense is if the president is reelected and he doubles down on the policies that he's been pursuing in trade war with China, anti-immigration policy, skepticism around foreign investment, that's going to be very hard on the economy. It's going to be very difficult for him to pass another round of tax cuts, particularly if the House remains Democratic, which seems likely at this point.

JULIE HYMAN: Mark Zandi, thanks so much. Appreciate it. Be well. He is Moody's Analytics' chief economist.

MARK ZANDI: Thank you.

JULIE HYMAN: Thank you.