Fed says it is watching vaccination progress

Yahoo Finance’s Alexis Christoforous and Adam Shapiro along with Zach Griffiths, Wells Fargo & Co. Senior Macro Strategist, discuss the Federal Reserve’s holding rates at near-zero.

Video Transcript

ALEXIS CHRISTOFOROUS: Zach, when you look at what the Fed said in its statement today, basically not moving much off its old statement and making no move on interest rates, you would think that this would reassure the markets and perhaps would have been enough to help the market bounce off these lows with the sell off that we're seeing today. That's not happening. So what do you think is at play here at the moment for the market?

ZACH GRIFFITHS: I think what you're seeing is the market anticipated not much from the Fed and anticipates not much from the Fed for a long time going forward, certainly with respect to being very accommodative. And that's our expectation. So what we're looking for in the press conference is any additional clarity on what the Fed means exactly when it says substantial further progress as far as its forward guidance with regard to asset purchases. But outside of that, I think you've gotten an outcome that the market largely expected and really expects for some time going forward.

ADAM SHAPIRO: Hey, Zach, I'm curious. Now, a voting member of Raphael Bostic out of Atlanta, I mean, it was unanimous in the statement today. But not too long ago, he talked about being open to the idea of tapering this year, depending on the virus, depending on vaccine distribution and economic performance. Does he have to walk back some words going forward? Again, he's a voting member.

ZACH GRIFFITHS: I think so. And frankly, we were shocked to hear any mention of tapering. I don't think the Fed has forgotten about what happened in May of 2013 with the taper tantrum. I think they want to avoid that at all costs. And after some of those comments came out from regional Fed presidents, I think Chairman Powell and a few others really talk down that possibility by making it clear that they expect to remain accommodative for some time.

And that really echoes what we got with the new longer-run framework for monetary policy announced in August of last year. I think the bar has been set extremely high for any tightening whatsoever, whether it be the policy rate or asset purchases. And it's going to remain that way for some time.

ALEXIS CHRISTOFOROUS: I want to get back on this topic of inflation because we just keep hearing so much about it over the past weeks. A few Fed officials have even warned that we could see inflation start to pick up sooner than expected. If that were to happen and the Fed does not respond with a rise in interest rates, what other tools might they go to to fight inflation?

ZACH GRIFFITHS: Yeah, that's a great question. And I think really what it comes down to is the Fed is not going to fight inflation any time soon. And with your last guest, you were talking about some of these funky numbers that we may get as the year-over-year comparisons for inflation show these big increases. And I think the Fed is really going to look through that. And they've communicated well that they're going to look through that.

And some of the commentary, we don't know exactly how long they want. 2% inflation to average, but it's clearly an extended period of time. And they're really not going to be doing anything to tighten policy anytime soon even if we do get one or two numbers that are well above their 2% target. And I think when it does come time to tighten policy in any way, it's going to come with a gradual taper to those asset purchases. But we don't think that's happening for at least another year.

ADAM SHAPIRO: Zach, why do investors not believe Jay Powell when he says we're not even thinking about thinking about tapering? Well, he's going to get a barrage of questions on that topic.

ZACH GRIFFITHS: Yeah, I think that's really going to be a big focus of the Q&A session and perhaps the press conference as a whole. And I think he's going to do everything he can to make it clear that the Fed is going to remain very accommodative. The public health situation has not been solved. I think we all got used to a lot of positive news around the vaccines and their efficacy.

But the rollout has been slow. And they even give a nod to that or at least the fact that they're tracking the vaccine rollout in their policy statement now. So I think he's really going to affirm these challenges that we still have. He's been on record saying that the pandemic is a disinflationary shock overall.

So I think he's going to hit on all of these things to do his best to reassure the market that tapering is not coming any time soon. Tightening's not coming any time soon. They're going to remain accommodative until some of these big milestones, like getting back to 10 million jobs that have still been lost compared to prior to the pandemic and pushing inflation higher really start to materialize.

ALEXIS CHRISTOFOROUS: Do you think that Jay Powell should mention the speculative frothiness, as Jared Blikre mentioned earlier, that we're seeing right now in this market play out in these handful of stocks?

ZACH GRIFFITHS: I don't think we're going to hear anything. And the Fed has had a tough time talking about asset bubbles in the past. We think with this small subset of stocks that have been talked about and really are in a frenzy lately, I think the Fed is going to want to avoid that and really focus on its dual mandate and providing broader accommodation to the economy to get us through to really the other end of this pandemic.

ALEXIS CHRISTOFOROUS: Would you agree that Powell is walking a tightrope? Brian Cheung, our Fed correspondent at the top of the show was talking about this. Does he need to be vague enough to not cause a big downturn in the market and spook the markets but yet, reassuring enough to say don't worry. We've got your back?

ZACH GRIFFITHS: Yeah, I think he's walking a bit of a tightrope. But they've been pretty clear on their accommodative stance. And some of the things I think that have been in focus have been asset purchases. I feel like it's been a huge swing from contemplating whether or not they would up their purchases or extend the weighted average maturity of their purchases to the more recent talk of tapering.

So I think finding a middle ground may not be as hard to do. And I think that Chairman Powell is really going to focus on, again, their dual mandate, the fact that we are facing a pandemic. And even though we have had progress on the vaccine front, we still have a lot of challenges ahead. And they're going to remain there to help the broad economy get back on its feet, especially as we still fight a pandemic that is raging on in our country and globally.