The Fed may begin tapering asset purchases ‘as soon as this summer’: Strategist

Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, joins Yahoo Finance’s Sibile Marcellus and Alexis Christoforous to discuss what to expect from the FOMC on Wednesday.

Video Transcript

SIBILE MARCELLUS: I want to zoom out and take a look at the broader market and bring in Liz Ann Sonders, Chief Investment Strategist at Charles Schwab. Liz, the Fed is meeting today and tomorrow. What do you expect to come out of the FOMC meeting?

LIZ ANN SONDERS: Nothing formal in terms of change to policy. And I think it's still premature to expect anything concrete from Powell, certainly pre-press conference, on the timing associated with what is likely to be tapering of the balance sheet preceding moves on rates. But I can't imagine he does not get peppered with questions on that front.

So I think it will be how he dances or provides some nuance around some of those questions. And then, just economic outlook is always something focused on, not just within the statement, but also in the press conference. And then some of what we're seeing in terms of the inflation data, not just within things like commodities, but some of the recent survey data suggesting that companies are increasingly going to a plan to pass on these higher input costs to their end customers. So I think those will be the topics that will be most in focus, certainly, during the presser.

ALEXIS CHRISTOFOROUS: Yeah, I'm glad you brought up those commodities prices, Liz Ann, because we're seeing them really take off, especially copper, which we know is an economically-sensitive metal. Do you think that the Fed should be messaging when they're going to start tapering their asset purchases? If you had to come up with a timeline for that, when might it be?

LIZ ANN SONDERS: Well, fortunately for everybody, I'm not in a position to come up with a timeline. I don't sit on the Federal Reserve Board. But you know, there have been enough hints and suggestions that it could be as soon as this summer. And I think that time frame may make sense, because the Fed has been talking about inflation being transitory in this environment, and probably will spend more time tomorrow talking about everything from the base effects that really carry up until about June, where those year-over-year comps and the traditional inflation metrics are such that we'll see a higher handle on those traditional metrics-- but also the supply demand imbalances, some of the supply chain disruptions, and then the feeder effect into broader consumer prices as a result of commodities.

So the timing of that surge we're likely to see tied to not just the inflation data, but economic growth, of course, it's now heading into the period where the base effects versus last year are going to mean some eye-popping numbers across the spectrum of GDP and jobs data. That would seem to make sense that when we get past the extreme of those base effects, then the Fed can start to address how transitory, in fact, the inflation risk is, and whether they feel it's time to start telegraphing the move on the balance sheet. They're not going to just announce that they're starting to taper the balance sheet they. Will telegraph it many months in advance.

SIBILE MARCELLUS: Liz, how are you seeing pent-up demand play out in the markets?

LIZ ANN SONDERS: Well, there's plenty of pent-up demand in the markets. But in terms of the economy, we're starting to see it in fits and starts, obviously on the services side of the economy. You're still somewhat at the mercy of the virus-- even psychological impact of just the horrible situation in India and the fact that we're not all vaccinated yet.

So fits and starts there, but when things are fully opened up, I expect to see a tremendous amount of pent-up demand on the services side. What I worry a little bit about is that there's too much extrapolating of what has already been an incredibly robust period for goods consumption. And just about on every measure of it, you're well above pre-pandemic levels. So I think extrapolating that strong demand far into the future may be the wrong way to think about goods demand.

I think that may have been part of the tepid durable goods report yesterday. Embedded in that is a bit of weakness in autos-- some of the leading indicators of housing starting to suggest a little bit of cooling down, because we had a ton of demand on the good side of what we consume. And that demand was met with ample supply.

So I just wonder whether there's just going to be a shift of demand to the services side, and that we may actually see a bit of pent-down demand on the good side of the economy. So I think that's just more food for thought as we move into this next phase of the recovery.

ALEXIS CHRISTOFOROUS: You know, Liz Ann, this Friday marks the end of President Biden's first 100 days in office-- seems like it went super quick-- and stocks in that time have gone up 10%. He certainly doesn't talk about the stock market in the way his predecessor, Donald Trump, did. But how much of that gain do you think is attributed to President Biden's policies?

LIZ ANN SONDERS: I don't tend to put a high percentage weight on any political figure as it relates to the stock market. There are so many forces that impact the stock market. And I think whether you're during an election period, in the immediate aftermath of an election, even the 100 days after, there's an attempt to connect those dots directly.

But all we have to do is think about one step down for broader averages and think about the narratives that were in play when President Trump won in 2016-- that this was going to be fantastic for sectors like financials and energy in terms of deregulation. Yet those were the worst-performing sectors for four years. It was sort of the opposite when Biden won.

This is going to be terrible for energy and financials, and they did extraordinarily well-- not because either of them shifted gears in terms of the policies they were proposing, just that there are forces, I think, much more dominant, long-term, and powerful that drive markets. Politics can be a portion of it, but too often they're pinpointed as if that's the primary driver. And you have plenty-- 100 years of history to suggest that there are other factors that ultimately take precedence in terms of what truly drives markets.

SIBILE MARCELLUS: We will definitely keep a close eye on that. Liz Ann Sonders, thanks so much.