Fed Chair Powell delivered 'hawkish message,' strategist says
Tom Graff, Brown Advisory head of fixed income, and Gregory Faranello, AmeriVet Securities U.S. rates group head, join Yahoo Finance Live to discuss Fed Chair Powell's remarks today and the outlook for monetary policy.
ADAM SHAPIRO: Let's bring in the panel, because we need to talk about what's going on. Tom Graff from Brown Advisory Head of Fixed Income, along with Gregory Faranello, AmeriVet Securities US Rates Group Head. It's good to have both of you here. And I want to start with Tom.
When you point out that the key for the Fed Chair today was to have a tone, and he has to walk a kind of Johnny Cash fine line-- he can either be hawkish or he can be dovish-- and I'm curious, did he achieve what you think would be appropriate? Or watching a bit of a sell-off, did we get a Powell plop?
TOM GRAFF: Well, Thanks for having me. You know, I think he communicated a hawkish tone, to be sure. I think bringing in-- talking repeatedly about how this time, the economy is much stronger than it was in 2015 when there was sort of a very slow and halting rate hiking cycle, and then also sort of not answering some of the questions that Emily mentioned in the beginning-- not committing to either hiking or not hiking at every single meeting or whatnot, all of that kind of pointed to-- and then, as you also mentioned, I think him saying that his own core PCE forecast would be up since just six weeks ago, I think all that's delivering a hawkish message.
And I think he does that on purpose. So I think what he's trying to say is maybe the market hasn't priced in as much action as they see coming, and he doesn't want the market to be surprised down the road.
EMILY MCCORMICK: Gregory, I'm wondering-- during the press conference today, fed Chair Jerome Powell really said five times this is not going to be the same cycle that we saw back in 2015 when the first interest rate hike was at the end of that year, and the next one didn't happen until a whole year later. I'm wondering, what do you think that sort of historical reference point signals to markets here about what we should expect given the lingering uncertainties that Powell did leave in this press conference about what to expect this year?
GREGORY FARANELLO: Sure. Thank you for having me. I mean, we don't really have-- we have a playbook, but we only have one playbook, and certainly not through a pandemic. So you know, what we've emphasized to our clients is it's relatively the same playbook, but it's quicker, right?
So if you look at really what the Fed has done since late last year, you look at what markets have done, financial conditions-- and they do need financial conditions to tighten to slow down the economy, but they need it done in an orderly fashion. So I thought the chairman had a good look today in terms of how markets have been reacting here.
But certainly, I think the Fed is ready for March. I think the chair is ready to lift off in March. We think it's going to be 25, but certainly, I don't think he ruled anything out today. And then with use of balance sheet, you know, the balance sheet's a lot bigger. If you look at the duration of the balance sheet, it's shorter.
So the runoff can certainly be quicker. And we think that's going to come sooner. We think the signaling today, what I heard from the chairman today is, look, we're still working on it. We're not going to give you an exact timeline. So let's assume they lift off in March-- whether they go 25 and then another 25 in May, potentially in June. He said they're going to need another couple of meetings to get through this.
So they're trying to manage, I think, markets and expectations in terms of when they will get to a game plan, which certainly will be, I think, definitive, and then to make that announcement and start to roll off the balance sheet middle of this year into the later part of 2022.
ADAM SHAPIRO: Gregory, to follow up on that, though, because you used the word expectations, as did the Fed Chair, because as we all know, at least when it comes to inflation, it's the expectation that they're trying to control so that that doesn't get out of hand. Now we've got the rolloff. And we've seen just the volatility in the past two or three weeks, and we knew everything that was coming down the pike today, essentially. So not much has changed. But it seems what I'm hearing you say is this volatility doesn't end until they actually begin the rolloff? Or we're going to get some stabilization very quickly?
GREGORY FARANELLO: I think we need to get past-- it's a great question. I think we need to get past the next couple of months. We still expect volatility in the markets here in the coming months as we get closer to liftoff. You know, certainly, the data is going to matter between here and March.
We expect the inflationary readings to still be hot here short-term. The Fed has very little flexibility around that. So I think the volatility that we're seeing in the marketplace right now is here to stay. We're not really going to get clarity-- I think more clarity-- until we get some Fed speak. I think between now and the March meeting, some more data between now and the March meeting, get past that first rate hike, and get a better sense for what that pathway looks like not only for rate hikes, but the balance sheet.
So we're still in the camp here that markets are adjusting to this dramatic transition, that the Fed has really thrown a lot at markets when you look at it within a short period of time. We're going to end asset purchases in March. We're going to lift off. And then we're talking aggressively about the balance sheet running off. I think within a short period of time, I think the Fed is throwing a lot at the markets.
EMILY MCCORMICK: Tom, one of the things that Powell clarified during his press conference was that he doesn't necessarily expect supply chain issues to be completely worked out by the end of this year, but that progress will be made in the second half of the year. I'm wondering, how do you think that informs investors on how the Fed and how Powell is thinking about inflation and inflation expectations and where they're being anchored by consumers?
TOM GRAFF: Yeah, well. I think there's uh
EMILY MCCORMICK: All right, I think we actually lost Tom for a moment there. Do you want to kick that same question over to you, Greg, if you have thoughts on that as well.
GREGORY FARANELLO: Can you share that one with me again?
EMILY MCCORMICK: Absolutely. So one of the things that Powell was clarifying during his press conference was that he doesn't expect supply chain issues to be completely worked out by the end of this year, but that progress is going to be made in the second half of the year. I'm wondering how you think that is going to inform how investors should be thinking about the Fed's views on inflation and where consumers' inflation expectations are being anchored.
GREGORY FARANELLO: Sure. And that's really important. So the here and now, I think, is what the chairman is telling you. I don't think the Fed has a lot of flexibility. If you look at 2021, you know, certainly the Fed was off base with regard to transitory. So they've got some work to do here short-term, I think, to regain some credibility.
So for investors, I think that's phase one here. Now, the second half of this year, inflation may very well come down. Our own forecast is for the economy to slow. But the reality is what we're seeing now, what we're seeing in the second half, that could very well impact, you know, how the Fed guides rates or if inflation does come out down and those supply chain issues do alleviate.
But that's really not the here and now, is what I would say. But in the end, look, it's a long year. We're one month into the year. We still think this could be a good year for risk assets and for markets. We need to get through this transition. We need to get more clarity on the pathway of inflation.
I think we need to get that first rate hike under our belt. And then we'll have a little bit more clarity, I think, in terms of how the second quarter, third quarter looks, where the Fed's cards are in terms of how many rate hikes. You know, but certainly, look, this is a very strong economy in general. It's going to slow from extreme levels. But the reality is there's no reason why this economy can't handle one, two, three rate hikes and a little balance sheet runoff. There's plenty of liquidity still in the system.
ADAM SHAPIRO: What you've just said is calming, didn't quite hear that, perhaps, from the chair. But this is more of a personal question because he's gone from inflation is transitory to now very concerned about inflation perhaps being persistent. I got to ask you, we're told-- a lot of us are told that the Fed doesn't really let the markets influence its decision-- they pay attention-- nor do they let politics. But it sure sounds like the chair is covering his tush when he switches so drastically on inflation. What do you think?
GREGORY FARANELLO: You weren't going to let me off easy, Adam, I knew it. So, look, if you look at-- we wrote this morning in our morning piece, if you look at the dynamics from the prior administration-- in 2018, we had then-president Trump that was screaming at the Fed to stop raising interest rates. Ultimately, they did, and they brought interest rates back down.
Now, you look at the dynamics, they really couldn't be polar to what they were back then. We have inflation that's obviously impacting all Americans across the board. But politically, we also have a dynamic where it's impacting the political dynamics for the current president, right? So I think Powell is in a little bit of a tough spot right here.
He's going to get renominated. But in the end, what he put forward today, I think, is the pathway that we're seeing right now, which is we're on our game, we're going to fight inflation. How successful they're going to be in the short-term, I think we're going to have to see. And then I think the bigger risk, really, for markets over the longer term is if inflation doesn't come down, the Fed is going to have to get more aggressive. But we're not quite there yet.
EMILY MCCORMICK: Tom, I'm wondering-- one thing that Powell also noted was that there was quite a bit of room to raise rates without hurting jobs. Do you think the Fed is actually going to be able to achieve the soft landing that it appears to be gearing towards right now?
GREGORY FARANELLO: Yeah, so that's a great question in terms of soft landing. I mean, if you look back historically, unfortunately, the Fed generally, they moved to a position at some point-- we saw this back in 2018, although we don't think this is 2018. If you look at the balance sheet, it's far bigger. If you look at reserves in the banking system, they're far greater. So the Fed has, I think, a little bit more flexibility here.
But the question is, yes, can they orchestrate a soft landing? And I think we're going to have to see the answer to that. I think what the Fed is saying, and we've been a little critical in saying they've been slow in removing some of these emergency measures, the balance sheet included-- I mean, they're still going to buy through March. So that is the question.
Can we orchestrate a soft landing here? And I think it's going to be a trial and error. And I think that's why even with the balance sheet, you didn't really hear-- there were some really good questions-- you didn't really hear a totally definitive answer from the chairman in terms of a reaction function with the balance sheet, because I do think it's going to be a trial and error. And I think case in point is if you look at the markets here right now over the last month, you look at some of the Fed's actions, you look at some of these market reactions, they will pay attention to how markets react.
We don't think the reactions that we've seen in markets right now is enough to change the Fed's stance. But keep in mind, like I said before, they're throwing a lot of this market within a very short period of time. So this is not going to be a straight line. It's going to be touch and feel. They're going to get going here with some rate hikes. They'll put a plan in place for the balance sheet. But it's not going to be full speed ahead without taking a look at what financial conditions are doing and how quickly they're moving.
ADAM SHAPIRO: Greg, just got to say-- trial and error, markets don't seem to be afraid of trial. It's the error they fear. And so let's hope they get this right. Thank you so much for being with us.
Gregory Faranello is AmeriVet Securities US Rates Group Head. Also want to let everybody know we had some technical difficulty, but we always appreciate Tom Graff, who is Brown Advisory's Head of Fixed Income joining us. And we promise to get the tech issues fixed so that Tom can join us once again real soon.