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Powell says 'fiscal policy is the essential tool' for recovery

Yahoo Finance’s Alexis Christoforous and Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, discuss Fed Chair Powell's comments on stimulus.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to stick with the markets now and bring in Kathy Jones. She's chief fixed income strategist at Charles Schwab. Kathy, always good to see you. So you just heard what Brian had to say, sort of recapping Powell's comments today. Nothing seems to be in those comments seems to be moving the markets at the moment. What do you make of his continued take on patience when it comes to policy and being very accommodative?

KATHY JONES: Yeah, it's true that he has not said anything that he hasn't said many times before. It's just when the Fed chair says it, it has more weight than perhaps other members of the Fed. But I think that we're really in an intriguing point right now in terms of monetary policy. You know, we have never, in our experience, had a Fed that actually was trying to lift inflation and was-- is signaling that it's going to wait for inflation to move up before it even considers doing something about it. It's really a very unique moment for us.

And obviously, they're looking back at the last recovery being so slow and inflation underperforming their expectations for a long time. But when you take what he's saying and you combine it with the potential for a really large fiscal stimulus package, you can say, well, maybe the next year or two, we probably won't get much inflation because there is all that slack in the economy. But what about two, three, four years down the road? Is this really setting us up for higher inflation? And I think that's what the market is keying on these days.

ALEXIS CHRISTOFOROUS: Do you think that-- well, how much of a risk do you think higher inflation is for the market? If it's two or three years down the road, should the market be focusing on it? Should the market be pricing that eventuality in?

KATHY JONES: Well, yeah, that's what markets do. And so, they're going to start doing it, as they have to some extent so far. But I think it's really a question of the magnitude of how much inflation do you price in. Will we actually get much above the 2% or 2 and 1/2% inflation rate down the road, or are we really-- is that really the ceiling, as it has been for so long, and it comes back down?

I think there's more chance of it moving above that level in the next couple of years than we've seen in many, many years, assuming we get the kind of fiscal stimulus that's expected and we have this shift in attitude by not only the central bank, but the fiscal authorities that it's OK to run the economy somewhat hot. It's something we just haven't seen in the past.

So you look at the size of the fiscal package. If our output gap is around 400 to $450 billion and we're going to put a trillion and a half or $2 trillion against it, we're going to get a lot of stimulus in the economy. And that's going to be an interesting dynamic for Fed policy and for inflation. I think at a minimum, we get more volatility and inflation going forward than we've had in a long time.

ALEXIS CHRISTOFOROUS: I want to talk about just the short-term for a moment and the frothiness that we seem to be seeing in this market. Yes, we have strong earnings. Yes, we've got fiscal and monetary policy hopefully coming down the pike very soon. But with all the discounting we're seeing in the market, do you think we're primed for some consolidation here, at least in the short-term?

KATHY JONES: Yeah, I think our view is that you have to be a little bit careful here, because we've had all-- you know, we've had the frothiness, the meme stocks activity, which just speaks to a lot of excess capital sloshing around, looking for a place to go. And I think that it is probably time to be a little bit cautious. I know that we are looking, from a sector point of view, to be overweight financials and healthcare and underweight utilities, trying to benefit from some of the big trends and avoiding some of the interest rate risk in the market.

ALEXIS CHRISTOFOROUS: Before we let you go, I know fixed income is your specialty. Yields are low all over the place. Where do you see money flowing into the bond market right now?

KATHY JONES: Well, you know, because of the combination of very easy monetary policy and expansive fiscal policy, it's a great environment for credit and for risk taking. So we're seeing money still go into things like high yield bonds and emerging market bonds, which we actually-- we favor.

We like emerging market bonds as a global reflation play. We're also seeing it going into bank loans. And I don't see, really, that that looks terribly attractive, unless you think the Fed's going to hike rates. But EM is where we think that there's a case to be made that it could outperform this year.

ALEXIS CHRISTOFOROUS: All right, Kathy Jones, chief fixed income strategist at Charles Schwab, good to see you.