‘There is political pressure building on the Fed’: Sevens Report Research Founder

Tom Essaye, Sevens Report Research Founder, joins Yahoo Finance to discuss the outlook on the Fed following the latest economic data and inflation expectations.

Video Transcript

- I want to continue this market conversation. We're joined now by Tom Essaye, founder at Sevens Report Research. So Tom, let's just start with inflation. The CPI numbers that came out today hit another record high, just as a reminder for everyone, 7.8% year over year. PPI we got yesterday was about 5.4%, if my memory serves. I think that is correct or 5.5%. Are you seeing right now increasing pressure, at least on the Fed, to really pull some of that easy money off the table?

I'm interested to see now, any time you type in inflation into Google, it's not just that market conversation. But now I'm also seeing the political chatter of how inflationary pressures are really perhaps weighing on the White House. So I'm not sure if we might see another showdown there between Biden and the Fed, like we did with Trump and the Fed. But do you think right now that the Fed is increasingly getting pressured to do something about these inflationary pressures, which so many folks say are perhaps a little bit more durable or a little bit more sticky than transitory seem to suggest?

TOM ESSAYE: Yeah, I think what's happening is we are seeing a difference in how the Fed defines transitory, which can last for several quarters or even beyond a year, and how people, like you and I, define transitory. I mean, if I-- if I see my bills go up 10%, 15%, 20% and it lasts for six months, you know, that's not transitory to me. And so I think that that's beginning to bubble up politically. And inflation is not good for the party in power.

There's tons of history to demonstrate that. So I think that there is political pressure building on the Fed. Now, that said, nothing that happened with CPI or PPI this week is going to make the Fed more aggressive on tapering QE. Yes, the numbers were high again. But they were expected to be high. And there's still plenty of evidence for those people who want to believe that inflation is transitory to continue to believe that.

A lot of this is commodity related. A lot of it is still supply chain related. And here's the thing, with COVID coming back, especially in China, we're going to see continued disruptions. And I'm sorry, folks. This whole supply chain issue is not going away anytime soon. And when I mean soon, I mean not for months or quarters, until everyone gets back open and those factories start humming again and ships start running again. So we're in this for a while.

BRIAN CHEUNG: You know, Tom, I want to ask just kind of about the way that markets have been reflecting that inflation story, though. Because what is interesting, and I guess this depends on how much water you hold in inflation expectations, but when you look at market-based measures of the spread between 5-year treasuries and 5-year tips, it's been pricing about the same level, which is about 2 and 1/2 percent inflation over the next five years.

So when you take a look at market-based measures of inflation expectations kind of staying flat, you look at the volatility in nominal bond yields themselves, what is the story? Does that mean that markets have effectively already priced in everything that you were probably just kind of talking about?

TOM ESSAYE: Well, I think that the 5-year tips over treasuries breakeven is heavily influenced by the price of oil, right. Because that goes off of headline CPI, which has a-- energy as a major component on that. So if you actually put the price of oil and tips over treasuries breakeven side by side, you'll notice that there's actually a very high correlation between the two. So the fact that oil has plateaued, it's also helping to plateau inflation expectations, especially in the market.

However, what we're focused on is consumer inflation expectations. They have also plateaued for now. And I'm going to be very interested to see what happens here in the next couple of months. Because if the consumer inflation expectations, the Fed keeps this number, the Conference Board keeps this number, University of Michigan keeps this number, if they rise well above 3% over a multi-year period, that's a problem.

Because that means that it's going to cause people to pull forward buying to try and get lower prices, right, which creates more inflation. So inflation expectations are very important. I think, to really get a full handle on it, we've got to look at the market based and the consumer based as well. But the Fed is watching it also. So that's definitely something to keep an eye on.

- All right, we're going to leave that there. Tom Essaye from Sevens Report Research, thanks so much for joining us today.