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It makes sense to go into this Fed meeting positioned for a positive surprise because of low expectations: Economist

Aneta Markowska, Jefferies Chief Economist joins the Yahoo Finance Live panel to discuss the impact of the elections on the markets.

Video Transcript

ZACK GUZMAN: I want to bring in our next guest, Aneta Markowska, as Jefferies Chief Economist, and she joins us now. And, Aneta, I mean, you guys were just looking at a poll here for what investors are expecting. Interesting to see that you guys showed investors only about 23% expect to know the results on election night. So what does it say about the volatility for us ahead?

ANETA MARKOWSKA: So I think there is certainly some expectation built into the market that it'll take, you know, at least several days to get the final results. As you mentioned, 23% only expected to know on the election night. But 40%, on top of that, expect to know by Friday. So, if it takes a few extra days, I think the markets can deal with that. But, if it spreads beyond this week, I think the markets might start to wobble a little.

AKIKO FUJITA: I mean, we're coming off of the worst month since March. There's no question a lot of investors are a little jittery right now, hearing all this talk about volatility, seeing what happened last week, despite the rebound that we're seeing in the session today. What is your advice for some of these investors you have been consulting with? Is it to keep some cash on hand, or is it to stay the course right now and just ride out some of the bumpiness?

ANETA MARKOWSKA: So I'm an economist, so I don't necessarily make investment recommendations. But what I can say is that a lot of our investors are going into this with pretty flat books, right?

It's, obviously, a lot of uncertainty. We learned four years ago that these things can go in very unpredictable ways. And I think investors would rather, you know, maybe leave a little bit of money on the table and be late into the game but, you know, not make any terrible mistakes. So I think, you know, you don't have a lot of positioning going into this, which means that, whatever the outcome, we might see a pretty significant move once we know what that outcome is.

ZACK GUZMAN: Yeah, Aneta, when we think about catalysts here, too, of course, we're going to have the Fed making their decision coming up here. But, on that front, not a lot of expectations for more in terms of what they can do. Of course, Fed Chair Jerome Powell has always put the pressure back on Congress to get more done in their avenue. So what's your take on what investors might be bracing for when we do get that policy announcement?

ANETA MARKOWSKA: So I actually think that it makes sense to go into this meeting kind of positioned for positive surprise because expectations are for so little. And, when you go back to the September discussion, you know, that the FOMC had, they had a pretty constructive outlook on the economy. But they also risk skewed to the downside.

And two top of those risks were, one, if we don't get fiscal stimulus this year-- and we didn't-- and if we get another wave of COVID infections-- and we did. On top of that, obviously, financial conditions have tightened a bit. And, if you look at inflation expectations, markets are just not buying the new framework.

Inflation expectations haven't moved up at all since Jackson Hole. And, in some measures, that actually drifted lower. So I think there are a lot of compelling reasons for the Fed to do something quickly and not necessarily wait until December. So, you know, the Fed's MO, they've demonstrated pretty clearly throughout this year that they've been ahead of the curve when it comes to COVID and downside risks to growth. So I actually think there is a chance that they might deliver a little bit early rather than wait until December.

AKIKO FUJITA: And Aneta, even with those two key risks that have, in fact, materialized, which is no stimulus and then the expected wave or winter wave, you could argue, for these COVID cases, what does that mean for the recovery in the broader picture? We've already seen the labor market recovery there start to slow down. There's always been concern that, increasingly, with these businesses, people aren't going to want to go out in the winter months. I mean, how are you looking at those two key risks as we look to the months ahead?

ANETA MARKOWSKA: So our base case is that we do get a pretty significant slowdown in growth for consumption. We actually expect it to completely stall out in the fourth quarter so, you know, pretty much zero growth. There is a little bit of an offset from inventory rebuilding. And I think housing activity will probably remain solid.

But, nonetheless, we think we're going to slow to about 2 percentage point growth in the fourth quarter. So it's going to feel like, you know, hitting a speed bump at 100 miles an hour, considering that the growth that we're coming off of. And that's driven to a large extent by the fact that we did have a what I would say a premature withdrawal of fiscal support. I think that's going to weigh on growth in the fourth quarter.

And then, obviously, you know, the COVID resurgence certainly won't be as bad as it was the first time around because the economy sort of adjusted in many ways. But nonetheless, I think, incrementally, that's certainly a downside risk. And I think, like I mentioned earlier, those are pretty compelling reasons for the Fed to respond.

ZACK GUZMAN: Absolutely, of course, there are limited maneuvers they can still pull here. And we'll watch what Jerome Powell has planned on that front. But Aneta Markowska, Jefferies' chief economist, appreciate you taking the time to chat, and be well.