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The Fed is now officially 'concerned about inflation,' Wells Fargo economist says

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Wells Fargo Senior Economist Sarah House joins Yahoo Finance Live to discuss the implications of the Fed's latest announcement.

Video Transcript

JARED BLIKRE: But we want to continue the conversation with Sarah House. She is a Wells Fargo senior economist. And you've been listening to our commentary here. What's your initial reaction to this report here?

SARAH HOUSE: Well, I think we've seen the Fed finally get concerned about inflation. So we see that with the upward revisions in terms of the summary of economic projections, both in terms of those inflation forecasts, but also, of course, those moves in the dots. So I think they've come around to the view that we are going to see these bottlenecks persist and that you have seen this tremendous demand that's going to take some time to cool off and will probably take somewhat tighter policy, particularly in areas that are interest rate-sensitive.

ADAM SHAPIRO: Hey, Sarah, it's Adam. I want to get back to this concept of purchasing power. The steps they took today, is it really going to take two to three years to see that really materialize? Or with the dollar going up in value, just by an announcement that tapering will be faster, doesn't that help me as a consumer and as an investor?

SARAH HOUSE: I think, given the inflation that we're seeing today, the impacts of the dollar are going to be pretty limited. So you have to remember when we think even import prices, that most contracts are already priced in dollars. So I think the efficacy there is limited. I think so much of this comes down to the overwhelming consumer demand that we've seen in the wake of the COVID pandemic and just the issues with supply chains and manufacturing globally keeping up with this, creating this inflationary bout. And so I think it is going to take some time to essentially normalize these patterns and, with that, some tighter policy.

KARINA CONTRERAS: And I wonder, from the announcement, it says jobs gains were quite solid, according to the decision. How close are we to full employment? And do you think the Fed has abandoned that part of the mandate to some degree to focus on inflation?

SARAH HOUSE: So I think they are giving more weight to inflation right now, given that it's what's really out of bounds with its goals. And the fact that we have seen this improvement in the labor market allows them to focus more on the above-target inflation. So they're not having to weigh one versus the other quite as much. But given the fact that we have seen the labor market tighten tremendously, even in just the past few months--

So over the past three months, we've seen the unemployment rate drop a full percentage point. I think that has allowed them to focus more on inflation for what seems to be quite a change from what we've seen over COVID and, really, the prior cycle.

JARED BLIKRE: And Sarah, this seems to be a somewhat hawkish report. But nevertheless, I'm looking at stocks. And the initial reaction is to the upside, also saying that, given the fact that three of the members-- or excuse me, that the members of the Fed are expecting three rate hikes next year, that is the median number.

The Fed OIS swaps-- I'm just reading this headline right now-- is now reflecting that. So what are the odds that the market is just comfortable with everything that's coming down the pike here, including, potentially, three rate hikes next year?

SARAH HOUSE: Well, this is a big shift from the September summary of economic projections. But it's not necessarily a big shift from what the market was already pricing in ahead of today's meeting based on some of the more recent commentary that we've had from officials and the recent data. So markets were already roughly pricing in 2 and 1/2 hikes. So the fact that the dot plot shows three for 2022 isn't that much of a change.

When we look at where the median rate is for 2024, it's not much higher than where it was prior to this. So I think what we're seeing here is that these changes were well-telegraphed. And so I think that's at least helping, for now, things seemingly stay pretty smooth.

ADAM SHAPIRO: Sarah, when they say that inflation is basically the result of this supply-demand imbalance, are they missing something with the tremendous amount that they're holding on the balance sheet? And when Jay Powell is asked about this, what would you want to hear his response be?

SARAH HOUSE: So I think in terms of those supply-demand imbalances, it comes from everything from the amount that households are spending on goods but also even what's considered services, like housing. So the fact that we have seen preferences shift in light of the pandemic.

Now, part of that strength in housing costs, that is one of the big factors fueling the more recent momentum in inflation is from the fact that we have seen such low rates. That's allowing these higher prices. And so I think that does play into it to some extent.

KARINA CONTRERAS: All right. We will have to leave it there. Sarah House, Wells Fargo senior economist, thank you for your insight today.