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The market reaction is consistent with what Fed Chair Powell is trying to achieve: Strategist

Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, joins Yahoo Finance to discuss the market reaction following remarks from Fed Chair Jerome Powell, outlook on inflation, and risks for the overall market.

Video Transcript

- And Jay Powell today saying at the Jackson Hole Symposium, which is a virtual event once again, that the central bank shouldn't rush to combat the spike in inflation. Let's talk about this more now with Kathy Jones over at Charles Schwab. She is chief fixed income strategist there. Kathy, always good to see you. Talk to me about your reaction to the way the market is reacting to what Fed Chair Powell had to say today.

KATHY JONES: Yeah, I think the market's reaction is consistent with what Powell was trying to achieve and that is, yes, we're aiming towards tapering and, you know, pulling back sometime in the future, but we're still going to keep policy easy overall. So what he's saying is, yeah, that we met some of the conditions necessary to start talking about getting to tapering maybe in September, November, December, but it's going to be a slow process. And the Fed really still wants to keep a fairly easy policy going forward so that it can promote full employment. And so his emphasis on inflation being somewhat temporary and employment not being fully where they want it to be made the markets really comfortable with the message.

- And part of that message was, you know, let's not be too aggressive until the labor market has an opportunity to heal even further. Take a listen to what he had to say earlier in his prepared remarks.

JEROME POWELL: My view is that the substantial further progress test has been met for inflation. There has also been clear progress toward maximum employment. At the FOMC's recent July meeting, I was of the view, as we're most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks.

- Now, you know, when you look at the day's economic reports, we saw that core inflation-- the PCE inflation rate at a 30-year high. We saw spending pull back a little bit, incomes rose 1.1%, so, again, a little bit of inflation pressure there on the wage front. Do you think that the Fed is doing the right thing by being a little more prudent when it comes to inflation because there are others out there, Kathy, who say the Fed is actually playing with fire and may find itself behind the curve when it comes to inflation?

KATHY JONES: Well, look, I think the Fed, if it gets really concerned about inflation and it becomes a problem, has the tools they need. All they need to do is stop tapering, stop buying bonds, and start raising rates, and they'll slow down aggregate demand, and that will kill inflation. But I think what they're trying to do is focus really on that employment mandate. And the lesson from the last cycle was that they didn't really wait long enough to let employment come back as much as it can.

So I think the debate among economists now is how elastic is that job market. Will people come back into the job market if there are jobs available and, kind of, temper some of the wage gains? And then you get supply coming online to meet demand and, you know, then Powell's prediction of inflation tapering down in the future will come true.

There are economists who think that the labor market won't heal that way, and that we permanently lost a lot of workers, and that's going to cause a wage price spiral. But we haven't seen one of those since the '70s. So I wouldn't be in the camp waiting for that to happen.

- And what do you think right now are some of the biggest hiccups for this market or hurdles for this market to overcome to continue this pace-- this torrid pace really that the market has been on, not only stocks, but also earnings, which continue to beat lowered estimates, but beating nonetheless?

KATHY JONES: Yeah, I mean, I think we've had, kind of, a really perfect environment for companies to boost earnings. But now some of the cost increases are likely to catch up. And the question is will the demand stay strong enough for them to keep their margins intact and that's going to be the challenge. But by and large, you know, we're in an environment [? where an ?] easy monetary policy, expansive fiscal policy, we still have room for the labor market to bounce back a bit, and that means demand should stay pretty strong, consumers have cash, savings rates are high. You know, it's hard to make an argument against further progress in the economy and further progress in corporate earnings. Corporate bonds are reflecting that. Those yield spreads are very low relative to treasuries.

- All right, Kathy Jones of Charles Schwab, always good to see you. Thanks so much for being here.