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The market has to believe the Fed won't raise rates: Fmr Fed Adviser

Danielle DiMartino Booth, Quill Intelligence CEO and Director of Intelligence joins Yahoo Finance's Zack Guzman to break down what to expect from the FOMC decision.

Video Transcript

ZACK GUZMAN: Joining us now on more here for what to expect when Fed Chair Jerome Powell steps to the microphone, joining us is Danielle DiMartino Booth, former advisor at the Dallas Fed and CEO and Director of Intelligence for Quill Intelligence, joins us now. And Danielle, as I said, not a lot's expected in terms of what's going to happen to rates here, and we already got their changing policy here and average inflation targeting out of the way. But still, a lot to learn about where the Fed sees this recovery going and the back half maybe faltering a bit here. So what are you going to be watching for when we get that statement later today?

DANIELLE DIMARTINO BOOTH: Well, it's going to be a very tricky statement. I would not want to be sitting around that table in the Eccles building trying to get the fine print down, because there really is a bifurcated recovery going on right now. We've got upwards of 30 million people who are collecting unemployment in some form to consider, and by the same token, you've got decent retail sales.

You really are seeing a roaring housing market, and there's this, for the people in the economy who are employed, those people who can work from home, those people who have had the ability to move into the suburbs, their lives, their economic well-being is just fine. And if I'm the Fed and really want for Nancy Pelosi to bend and for there to be bipartisan agreement in Congress that there needs to be more fiscal stimulus so that the Fed can print more money. It's a difficult narrative to weave, because you can't not nod to the improvement in the economy, but you also have to-- you have to be mindful of all of the millions of Americans who are out of work, so I don't envy--

[INTERPOSING VOICES]

ZACK GUZMAN: It's going to be a very tricky, as you say, needle to thread here. But when you think about, I guess, also the other things we can be watching for, the dot plot, we're going to get that and summary of economic projections here. Looking at where they think unemployment might be. The last update we got on that was expectations here back in June saying that the unemployment rate would be expected to average about 9.3% in the last three months of 2020. We've already seen the latest jobs report show that we've moved past that better than that expectation here, so what are you expecting when they update their own expectations here for what's to come in 2020, and what should we be parsing out from that statement?

DANIELLE DIMARTINO BOOTH: Well, I think the Fed is going to be mindful that we've seen an increase, especially in August, we saw a 12.4% increase in permanent unemployment. So I think that they'll be very cautious in taking down their unemployment estimate too much. Obviously, it'll come closer to where it is today, but again, the market has to believe that the Federal Reserve is not going to raise interest rates. They'll be focused on that dot plot out for the next three or four years, that's what the market has priced in. So the Fed has to show in its economic projections that it anticipates a slowly healing labor market, and I think that that's exactly what we're going to see, in order to justify keeping rates at the zero bound for years to come.

ZACK GUZMAN: Yeah, and let's talk about that dual mandate, right? Because we've been talking about they're changing strategy on the inflation piece of it, since, you know, we haven't seen them really meet their 2% target here, now comfortable moving past it if it happens. But on the employment side, I mean, there's so much that we've heard Jerome Powell call for on the fiscal side. He's not getting it. And then what he has in his tool box, we've seen the main street lending program, I think would be fair to say, fail.

I mean, when we got the update that out of the $6 billion program, just 0.2% had been tapped. $1.4 dollars in loans there. It's not doing what I think a lot of people expected it to, and there's a couple of reasons as to why, but I'd be curious to hear your take on where that leaves the Fed in terms of what they can do to say we're doing everything we can to help push for full employment here.

DANIELLE DIMARTINO BOOTH: Yeah, it really does put the Fed in a precarious position because of the anemic-- we can't even call it anemic. There's been barely any uptake of the Main Street Lending Program. Bankers are extremely reluctant. The Fed's own data show that lending standards have really tightened up, whether you're talking about small businesses, commercial industrial loans, even all the way out to residential mortgages.

So I think that for Jay Powell to have this last Fed meeting before the presidential election, for him to have to come out and say, politicians, listen to me, this is a very strange, strange predicament for the head of an independent apolitical, theoretically, federal agency for him to have to come out and say this. So I do not envy him. He desperately needs the original three point something trillion dollars so that he can get the one tool in the toolbox that works, quantitative easing, really back up and running at record rates again which, of course, we've seen a lot of stagnation in terms of the growth of the Fed's balance sheet of late. I think they'd like to change that.

ZACK GUZMAN: And that would be like the last point that I would highlight here. I mean, we talk about what has worked. I mean, let's be real, you know, you had stocks moving back, hitting all highs after that big sell-off we had back in March. I mean, stability in the market at least, all the metrics and all the tools that they have been pulling, worked in terms of what we saw in the market, whether you look at equities or bonds as well.

But I would question how much that does for the main American, Main Street American here. When we think about half of household maybe not having any exposure to the stock market, all the Americans out there with no exposure in the real estate market, I mean, what does it say maybe about those Americans who aren't enjoying in this recovery?

DANIELLE DIMARTINO BOOTH: It's saying quite a bit, because as you're speaking to the concentration of stock ownership in this country is so confined to such a small cohort. We know that the growth of the Fed's balance sheet has an 82% correlation, 82% co-movement, if you will, with the S&P 500. So we know what quantitative easing benefits, but we also know that the Fed's transmission mechanism to the real economy has broken down. And rather than discuss a framework about raising inflation potentially to 3% on average when it's only hit it in 11 months since January 2012 when it set the 2% target in the first place, I would rather have the Fed go back to the drawing board and come up with the new framework that addresses fixing the transmission mechanism to the real economy. Otherwise, I think Congress needs to go back and discuss whether or not it's appropriate for the Fed to have the second mandate of maximizing employment.

ZACK GUZMAN: That's going to be a tricky meeting when we hear from Jerome Powell later this afternoon, just a little bit over an hour away. But a lot to discuss here, so I appreciate you taking the time to chat, Danielle DiMartino Booth, CEO and Director for Intelligence, Quill Intelligence, appreciate it again.

DANIELLE DIMARTINO BOOTH: Thank you.