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Fed officials are ‘walking a very delicate line’: Economist

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Lindsey Piegza, Stifel Chief Economist, joins Yahoo Finance to discuss the latest out of the FOMC.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to turn things over now to Lindsay. She is chief economist at Stifel. So, Lindsey, good to see you. I want to bounce off of what Professor Levin was just saying.

You know, some market strategists say this economic crisis is over. You've got the economy. Soaring wages are moving higher. Inflation is hot right now.

The economy doesn't need $120 billion of newly printed money every month. Is not tapering starting to taper now overkill from the Federal Reserve? And could it actually be dangerous down the road?

LINDSEY PIEGZA: Well, I think it's interesting. When we look at the upgrades that we see in this most recent set, the Fed did increase their expectations for inflation as well as growth and rates, but the labor market metrics were very much unchanged. So I would expect the chairman to really emphasize some of the uneven nature of the recovery during the upcoming press conference and really highlight the fact that, yes, we have taken great strides in terms of getting Americans back to work, but we're still talking about millions that have yet to be replaced to a position of gainful employment. So I do think that the Fed's focus is predominantly on the labor market. And the still incomplete nature of the recovery in the labor market justifies the Fed's continued accommodative policy at this point, at least, from their perspective.

- Lindsey, when you talk about them justifying that policy, it was Lael Brainard, the governor, who said it's also important to be attentive to the risks of pulling back too soon. We're seeing the markets react to this news about more of the members looking at interest rate increases sooner rather than later. But does this change those statements about we're worried about pulling back too soon?

LINDSEY PIEGZA: No. I think that Fed officials are looking at both sides of the argument. On the one hand, they are aware that inflation is on the rise. Now they're not necessarily overly concerned about inflation as we heard the other guest mention.

They've been very clear that they perceive inflation as a result of base effects or the economy recalibrating, both of which will begin to receive their pressure on prices as we head towards the end of the year. But on the other side of the equation, the Fed wants to be very careful to continue to nurture this recovery, because right now there still is a lot of artificial support, particularly from the federal government. And so the Fed doesn't want to be pulling the rug out from under this recovery.

At the same time, a lot of these benefits, these emergency measures from those in Washington are set to expire in the coming weeks and months. So I do think that Fed officials are looking at both sides of the equation. And they're walking a very delicate line trying to balance the risks of inflation and continue to support the recovery.

- Lindsey, I'm really glad you made mention of some of those benefits. The Fed pointing to the labor market really is part of the reason they don't want to take that punchbowl away from the party just yet. We're in this really interesting environment right now, where the labor market is tightening.

We hear employers saying, listen, we have the jobs. We want to hire people. We're trying to offer more money. And frankly, right now, we just can't find the workers.

We can't find the employees, even as we see millions of folks still out of work. So what is it going to take to get the labor market off of its knees and really back onto its feet? Is it part of those controversial policies of canceling some of those jobless benefits early, or are we going to see that happen when they expire, or is there something else going on here, at least in terms of salaries and benefits that need to be contended with?

LINDSEY PIEGZA: I think it's a number of factors. I think there's still a lingering impact from the virus, some people experiencing long-term effects. We also see day care and schools as an issue as well.

So once we start to move past summer, which a lot of summer activities were closed or at reduced capacity, and we get kids back in school full time, that's going to help working parents being able to move back into the labor market. But of course, we also have the policy issues. When you're offering someone X to not work or X minus 20% to work, most rational agents would choose that larger sum.

So it's certainly not a political statement or a judgment by any means, but it's a recognition of the fact that we have rational players in the labor market. So as long as that opportunity is out there, many workers are going to take advantage of that program that the government is offering. Now those benefits are set to expire in September, as we get again kids back to school, those programs expire, and we continue to re-open the economy, I would expect the pool of available labor to grow markedly, really easing some of those pressures that businesses have been reporting in terms of not being able to fill the existing vacancies.

- All right. Lindsey Piegza, Stifel's chief economist. Thanks so much for joining us.