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Fed is sending an ‘inconsistent message:’ Keel Point

Yahoo Finance's Akiko Fujita and Steven Skancke, Keel Point Chief Economic Advisor, discuss messaging coming from the Federal Reserve after its decision to hold rates steady.

Video Transcript

AKIKO FUJITA: Let's bring in Steven Skancke. He is a Keel Points chief economic advisor. And Steven, when we look at the market reaction right now, we've been talking so much about the investors being rattled by what we heard from the Fed yesterday. We also got some economic data that seemed to point to a slowing in the recovery. What do you think it is investors are responding to, or why do you think they are-- why do you think we're seeing the Dow down 208 points today?

STEVEN SKANCKE: Well, I think it's both of those things, Akiko. It's the messaging from the Fed. I mean, they said two things. One is outlook for the economy remains highly uncertain, and that's in contrast to the update in their outlook for 2020. They've reduced the loss that the GDP lost from 6.5% for the year to 3.7%. That's good news.

And the unemployment rate, they've been forecasting between 9% and 10%. Actually, their official forecast for the end of the year was 9.3%, and they've revised that down to 7.6%. So it's just that inconsistent message, as to-- you're showing us good news. But at the same time, you're saying the outlook is highly uncertain. And as we know, markets don't like uncertainty.

AKIKO FUJITA: I mean, is that what it comes down to, just being uncertain about where the Fed sees things? If you look at the numbers, to your point, they are pretty optimistic.

STEVEN SKANCKE: Yes.

AKIKO FUJITA: And then when you look at the inflation outlook through 2023, we're not seeing it anywhere near 2% as well. There seems to be some confusion on why the inflation framework was shifted in the first place if there is no expectation of an overshoot.

STEVEN SKANCKE: Well, that's a very good question. You probably noted that two of the FOMC members just said it because they thought that there wasn't enough clarity in what they said. Also, the issue of-- they're going to let inflation run hot a little bit, moderately above 2% for some time. And it was for some time that created all the disparities in interpretation after the August 27 announcement. And that has just-- that has heightened the uncertainty from what the markets are expecting.

You know, when people look at the Fed and they come out of these meetings, there's a general assumption-- not totally accurate, but nevertheless the assumption-- that the Fed knows everything about what's going on in the economy at that moment. And so notwithstanding the improved outlook, when the chairman of the Federal Reserve says highly uncertain, it just takes markets a while to get their head around it.

And then the new jobless claims number that came out this morning, as you mentioned, another disappointment. There had been a hope that we would see a continuing reduction in that number, and we really haven't it. It seems to be stuck in that 800,000 to 900,000 weekly new jobless claims.

AKIKO FUJITA: What does that tell you about where we are in the labor market?

STEVEN SKANCKE: Well--

AKIKO FUJITA: Are companies simply not rehiring anymore? Are we seeing more businesses kind of come up to that edge, not being able to remain open now? I mean, why are we seeing the stalling happening now?

STEVEN SKANCKE: Well, I think it's a couple of things, Akiko. But if we just put it in the context of what the Fed continues to reiterate, that is that the path of the economy will depend significantly on the course of the virus, two days ago, the daily new infection rate was 53,000. That's still at a very high number.

And just that fact and the awareness within the public, there are large segments of the public that are still shutting in, notwithstanding the economy technically opening up. People are reluctant to go back to the workplace, reluctant to go back to the marketplace, particularly in the service economy. 15 million people have left the labor force altogether. 1/3 of those where one parent is staying home to deal with kids not being back in school.

And so all of those things don't fully get picked up in the numbers. And-- but the reality is, without those people reengaging both in the workplace and the marketplace, the growth in consumer spending is not what it needs to be. I think the other thing, too-- and we'll see. Maybe there is a resolution of this sooner rather than later-- is that we've been waiting since May for some action on a new fiscal stimulus. And by some action, I mean something besides no agreement.

AKIKO FUJITA: And Steven--

STEVEN SKANCKE: --the-- go ahead.

AKIKO FUJITA: To that point, we have heard the Fed chair consistently say that there is a need for fiscal policy to sort of team up with the monetary side. There's only so much the monetary policy can do. Yesterday, he was asked about whether the central bank still had enough ammunition. He said, we do have lots of tools. I mean, do-- does the Fed still have tools that it can use in the case of no stimulus deal here? And to the broader question, how effective can those tools be without any help from the fiscal side?

STEVEN SKANCKE: Well, he's right. The Fed still has a lot of tools, and there is an expectation that they could grow their balance sheet by another $2.5 trillion over the next three or four months. But there's a big difference between what the Fed can do and what the executive and congressional branch could do with spending. It's like the difference between pushing on a rope, which is what the Fed is doing with continuing to expand the monetary stimulus, and pulling on a rope, which is what happens when the executive and legislative branches start spending.

No amount of credit availability and liquidity will cause people to spend if their unemployment benefits are running out or if they're unsure about their job security. Whereas, the money that got mailed out earlier this year, the augmented unemployment benefits, even where 60% of the people were getting more on their unemployment benefits than they were earning in their jobs, but they were spending that money. And that was a big part of the huge turnaround that we saw after the end of April.

AKIKO FUJITA: Yeah, no question that has provided a huge support. And that's the big concern now that that stimulus, as well as the additional benefits, are not there. Steven Skancke, always good to talk to you, joining us from--

STEVEN SKANCKE: Thank you.

AKIKO FUJITA: --Keel Point. He's an advisor there.