‘We’re obviously experiencing a temporary setback in terms of growth momentum:’ economist

Jefferies Chief Financial Economist, Aneta Markowska, joins Yahoo Finance to discuss what we should be expecting ahead of the Fed’s Jackson Hole meeting and how the economic recovery will have a significant role in the Fed’s decision making.

Video Transcript

JULIE HYMAN: Goldman Sachs out this morning saying that a tapering announcement could happen as soon as November, so not at the conference, but maybe indications about what's going to happen. Aneta Markowska's with us now, Jefferies Chief Financial Economist. And Aneta, in your note previewing the conference you say no fireworks. So what do you think is happening on the taper front? And do you think that-- how important do you think the timing is of when it begins?

ANETA MARKOWSKA: You know, whether it depends-- whether it begins in November, December, I don't think that makes a big difference. I think most of it is already in the price. My base case is November, so I would agree with that forecaster you just cited earlier. You know, the timing of this Jackson Hole conference is certainly interesting, because while we've seen the progress on the labor market that I think the Fed wanted to see, we finally are averaging about 950,000 jobs per month, at least in the last two months, so the labor market certainly seems to be moving in the right direction, but we're obviously experiencing this temporary setback in terms of growth momentum right on the back of all the July data that disappointed, and now obviously the Delta variant potentially putting a dent in service activity here in August and possibly into September.

But you know, so I would say it makes it difficult for the Fed to signal anything and to commit to any particular taper timeline at this point. But I think they do have to acknowledge that we have made further progress on those taper goals. And by the way, growth momentum is not part of the taper test, so it's just really more about the optics and the uncertainty that we're facing. I think it's a very kind of short-term pocket of uncertainty. And you know, things will feel very differently probably by October, and certainly by November, as the Delta peak is behind us.

MYLES UDLAND: And you know, Aneta, I guess we'll have this conversation through this week, but I do wonder if, speaking of the optics, the optics of having to make the conference virtual sort of puts into starker relief of a sort where we're at in the recovery and if maybe there were plans-- and I don't really think Jay Powell is the kind of guy who is going to change his plans for this sort of a speech overnight. But if there were plans to signal an earlier taper, it certainly gets more difficult when you've just had to kind of bring the conference back to a 2020 type setting, correct?

ANETA MARKOWSKA: Yeah, absolutely. And you know, he's been writing this speech for weeks now, so I doubt that it underwent any major revisions because of the conference going remotely. I mean, just think about last year. They were in the fully remote setting, and they were able to communicate a framework change. So I don't think it's a massive deal.

You know, but you're right, the optics are certainly a little bit tricky. I think this is just kind of symptomatic of what we're seeing in the business community more broadly, a lot of conferences getting canceled. That's obviously going to, again, put a dent in service activity in terms of flights and hotels. So I think that's certainly very true.

I do want to highlight, though, that, you know, it's the duration of this uncertainty that really we should be questioning, right. Because if the CDC projections are correct, and if, in fact, we are pretty much close to peaking in terms of Delta cases in the South and if they peak in the Northeast, say four or five weeks from now, you know, those optics can change very, very quickly. And I think by the November FOMC meeting, you know, the narrative out there and sort of the confidence about the recovery, the continued recovery, will be much stronger. So absolutely optics are difficult. It's a setback. But I think chances are that it will be relatively short-lived.

BRIAN SOZZI: How severe is this growth slowdown, Aneta? I was just reading your note this morning. And you show a lot of interesting charts on restaurant bookings. Those have been under pressure in recent weeks. Hotel rates, hotel bookings also under pressure. Just in terms of, I guess, GDP this quarter, what are you looking for?

ANETA MARKOWSKA: Yeah, so right now I think it's sort of realistic to look for roughly 3% growth, 3% to 4% range. And that's certainly down from where we were tracking-- or instead of what we were assuming going into the quarter, which is closer to 6% to 7%. So again, definitely a loss of momentum.

I would say what we've seen in monthly data, and even in real-time data that you showed there, it's basically a stall in activity. We're certainly not contracting. It's really just kind of a stall driven by certain sectors, those that are obviously more sensitive to the Delta variant. And even there, it's been very localized. So really, the bulk of the drug has so far come from the South.

So again, I would characterize it as, you know, a loss of momentum. We're certainly not contracting. And I do still think that there's a good chance we get a lot of it back in the fourth quarter and in early 2022. I mean, the fundamentals really have not changed.

We're still looking at the healthiest household balance sheets in decades, lowest inventories pretty much on record, CapEx intentions are very, very strong. So none of that has changed. Again, this is really just another delay in this recovery cycle that I think still has pretty long legs.

JULIE HYMAN: So Aneta, let's assume that this is happening, right, that we're having a delay of that resumption of growth or hotter growth. Let's assume the Fed does announce a taper, whether it's November or December, whenever it is. Given all that, will there be another so-called taper tantrum, do you think, in the markets?

ANETA MARKOWSKA: I really doubt it. I mean, what's so different this time from 2013, that 2013, the Fed really just dropped the bomb. And they went from not even talking about talking about taper, just saying, hey, we're going to taper here pretty soon. Obviously very, very different communication strategy this time around. You know, and even sort of from a few months ago all the way up to the actual taper announcement, I think they're going to communicate it very incrementally.

They added this language in the statement in July sort of acknowledging we've made progress. I think the next iteration will be upgrading that to further progress, and then eventually to substantial further progress. So by sort of communicating it in such an incremental fashion, I think they've taken pretty much all of the surprise element out of this. So, you know, everybody knows they're going to taper. The only debate is, you know, is it November, December, or maybe January?

Again, I don't think that makes a huge difference in terms of where the rates market's trading. I think the significance of the taper announcement, to me, is that it really kind of gets that out of the way and allows the market to focus on the next step, which is the timing of lift-off, and more importantly, what actually happens post lift-off and just how quickly do they tighten up from there on, because that's, I think, where the curve is most, you know, quote unquote, "mispriced" at the moment.