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Fed: coronavirus poses considerable risk to economic outlook

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Yahoo Finance’s Alexis Christoforous and Adam Shapiro along with Tony Rodriguez, Head of Fixed Income Strategy at Nuveen, discuss the Federal Reserve leaving rates at near-zero and the impact of the coronavirus on the economic recovery.

Video Transcript

ALEXIS CHRISTOFOROUS: What's your take on what we just heard from the Fed? And what will you be listening for when Jay Powell has his press conference at 2:30 Eastern-- which, by the way, we will be taking live once that happens.

TONY RODRIGUEZ: Sure. So my take would be that, you know, they clearly indicated they're very comfortable with financial markets functioning and liquidity-- hence the repo being reduced. So they may extrapolate a little bit on that in terms of what they're seeing. More importantly, I think it was positive from the standpoint of, I guess, reinforcing the dovishness of the Fed that they indicated that economic growth and activity is moderating.

And when you look at their last meeting in mid-December, what's happened since then we had an employment report that saw job losses. We had a weaker retail sales report. And we had a virus surge over the holidays. So acknowledging that I think reinforces the idea that they're going to be very patient, certainly with the policy rate, but also from the standpoint of quantitative easing, balance sheet growth, and the talk of a taper. That is definitely not a 2021 conversation that they are willing or expecting to have.

ADAM SHAPIRO: Tony, when you look at the statement, and they talk about the sectors that have been, you know, weakness concentrated in the sectors most adversely affected by the pandemic-- so how would you phrase the question to Jay Powell in the upcoming presser? Because Congress is debating stimulus, the chair and different Fed bank presidents have said Congress needs to do its fiscal stimulus. How would you phrase the question, because the chair never likes to pin it down, to pin him down about stimulus?

TONY RODRIGUEZ: I think the question will be, are you speaking to Janet Yellen on a daily basis to emphasize the need for the fiscal stimulus? I think that the point that Chair Powell is trying to make is that they can do a lot around financial conditions and supporting the economy or providing a little bit of a bridge here, but in terms of really directly impacting those who've lost their jobs, businesses that are shut down because they were exposed to face-to-face interactions like movie theaters, restaurants, et cetera-- the Fed doesn't really have the tools to do that, nor is it really specifically in their purview.

Whereas at the Treasury, they can, and the Fed can assist them. There are plenty of programs they put in place in combination with Treasury that can be supportive of small businesses. But again, that's outside of the purview of the Fed. So they really need the Treasury to lead that effort. And so I think that he'll talk about that fact-- that they are doing what they can, but that more needs to be done to support, again, the businesses that are suffering, the 10 million jobs that have been lost, all while we wait for the vaccine rollout to proceed and get to eventually that herd immunity point where we can hopefully see the economy open up more broadly.

ALEXIS CHRISTOFOROUS: I'd imagine that Powell is going to be asked some questions about inflation. We all expect inflation to heat up as the year moves on. We're already seeing it in pockets of the economy, including our food. Where do you think we might end the year when it comes to inflation? And might it breach the Fed's target? And if so, does the Fed move and start to raise interest rates?

TONY RODRIGUEZ: Sure. Great question, and it's certainly on everyone's minds. We're seeing, as you mentioned, commodities, things like that. We don't think you're going to see kind of widespread fundamental inflation pressures when we get to the end of the year. That'll be significant enough to worry the Fed. We will have to get through a period here in March, April where when you look at what happened in 2020 in March and April, big declines in inflation.

We're going to have prints that are quite high. And I think the Fed is going to look through that. And I think they're going to look-- and our view is that while we're going to see inflation, rise we don't think it's going to get to the Fed's target of 2% in 2021. And that's primarily driven by some of the broader impacts on inflation-- whether that's demographics, things of that nature, but the most important one being all the slack that we continue to have in the labor market.

You mentioned 10 million jobs have been lost, we saw the 6.7% unemployment rate. And we think that progress from here is likely to be a bit slower, because we also had a decline in labor force participation-- people who left the labor force. And as an economy opens up and we see recovery, we think you will see those people come back into the labor force, and that's going to make the unemployment rate a little bit sticky on the way down here as we approach levels such as 6% and 5%. So again, with that kind of slack, we think it's unlikely you'll see widespread inflationary pressures that begin to worry the Fed and make them feel that they have to start actually responding to them.

ADAM SHAPIRO: We're already going to start talking about the March meeting, because we get the next summary of economic projections. But given the uncertainty about pandemic, and vaccinations, and the emphasis they make on the pandemic and vaccinations, should we take those future summary of economic projections at face value or discredit them-- or discard them, rather, when we get them in March?

TONY RODRIGUEZ: Well, you know, certainly if we look at the S&P over the last couple of years, they've missed the mark-- and in some cases for good reasons. The pandemic was difficult to anticipate. So I think the market takes it as a little bit of grain of salt anyway. And the primary, I think, information value of the S&P is really from the standpoint of what the Fed thinking is in terms of a more dovish, more hawkish kind of approach to progress in unemployment, inflation, growth.

And I think from that perspective, they're going to continue to put out projections that indicate a very, very dovish approach over the course of '21 and '22. Beyond that I think is when it gets a little more interesting-- inflationary pressure's going to be a little more significant, recovery will have taken place, and kind of unwinding whether it's the balance sheet or the zero rate policy will then become a significant challenge, I think, for the Fed.