Fed will show ‘shift in language’ out of Jackson Hole: Economist

Atlantic Council GeoEconomics Center Director Josh Lipsky outlines what to expect from Jerome Powell in tomorrow’s Fed decision.

Video Transcript

AKIKO FUJITA: Let's bring in our first guest for the hour. We've got Josh Lipsky, Atlantic Council Geoeconomic Center director. And Josh, you heard Brian there say, is it time to talk about talking about tapering. What do you expect from the Fed this time around?

JOSH LIPSKY: Right so in that dichotomy Brian brought up, I'd say I'm on team transitory. And I think most of the Fed governors are still there. And of course, this idea that are they going to talk about talking about it, they're always thinking about it.

And the real question is, is Powell going to blink at this meeting? And is there going to be some language shift that people are looking for when it comes to tapering? And I think the answer is no.

And we can think about the G7 central bank governors meeting that happened two weeks ago. They were all together in the room. They were thinking about these issues together. Christine Lagarde at the ECB came out of that. She said last week, they're not changing their policy. I think the Fed is going to do something similar this week.

And it's really Jackson Hole in August when we're going to start seeing the shift in language. So I think it's steady as she goes. Let's see what happens over the summer. Let's move through some of these base effects that are really distorting the numbers. Let's see how permanent some of these supply chain issues can be. And then let's get the Jackson Hole and maybe start telegraphing a tapering process.

ZACK GUZMAN: Yeah. And Josh, I wonder if it's more kind of the global state of things right now that might be helping the Fed work through, taking a little bit more time to get there or whether or not their policy proposals and the way they've been framing all this has worked in convincing the public that the inflation data that we've been getting is just transitory. I mean, we look at that. And as Akiko points out, the 10-year yield at 1.5, talking about how they've been successful in maybe getting people to buy in.

JOSH LIPSKY: The Fed's been extraordinarily successful in their narrative. They've been consistent. And that's another reason why I don't think Powell is going to break too soon with it.

Already, we actually see some of the inflation expectations coming down from where they were just a few weeks ago. So that's a credit to the Fed by saying, we believe this is transitory and people agreeing with that. And so we're seeing some of that filter into the market.

So all of that plus the base effects, I think it's the US situation that the Fed's looking at primarily, of course. And then there's the other issue that Powell talks about so much, 8 and 1/2, 9 million unemployed. We don't talk about it as much. But this Fed talks about it a lot. And that weighs heavily on these governors. You saw Governor Brainard talk about that recently. That's part of the Fed's dual mandate as well.

So when you take it all together, take in some of this reversal in inflation expectations, I would be surprised at any signal in tapering right now. Doesn't mean the Fed doesn't need to do it. The economy still running pretty hot going forward. And you don't need $120 billion a month in perpetuity. But this is too soon in my opinion.

AKIKO FUJITA: Josh, I wonder how you're looking at this from a global picture. Obviously, you look at central banks around the world pouring in enormous amounts of stimulus over the last year. Your former boss Christine Lagarde talking about how she thinks some of these temporary factors could start to fade out by the end of the year. Which one of these big banks or big central banks do you think moves first?

JOSH LIPSKY: Well, all eyes still on the Fed, right? I mean, everyone wants to see what the Fed does. And the pressures are hottest in the US. And they're a little different in the eurozone, where we haven't seen the kind of stimulus we saw here. And they've taken extraordinary monetary policy action but not the same on fiscal.

So I still think it's going to be the Fed. And again, I do think it's going to be Jackson Hole. And think about the symmetry of that, right, Akiko? Because it was two years ago at Jackson Hole where Powell outlined the new framework. And he said we want to get sustained above 2%. Everyone said, really? Let's see what happens when push comes to shove.

And then it's like a baseball game. You get into the game. And the ball finds you right away. Sure enough, the crisis hit. And the Fed's hypothesis got tested. So I think it's the Fed that moves first. Maybe the Bank of England in September as well. But I think it's the Fed signaling in August and then ECB, Bank of England in September. That's what I see as kind of this back to school moment when we get to the end of the summer.

ZACK GUZMAN: Yeah. And I mean, we also, I guess, have the benefit of seeing vaccinations working here in the US, as we saw the UK kind of extend their deadline here for reversing their lockdown measures. And when you look at that, I mean, how important is that on the global perspective when you think about what we saw out of the G7 meeting here, not just in terms of boosting vaccine doses around the globe to kind of help this recovery globally but also the way that they've been approaching taxes and what Treasury Secretary Janet Yellen has been trying to do there to get these countries to work together? How much progress is being made on that front relative to what we saw in kind of the nationalistic stance that President Trump took?

JOSH LIPSKY: Yeah. If you think about the G7, both the finance ministers and then the leaders, two headlines for me, shots and taxes. And those are two pretty big deliverables. And shots as an economic story as much as it is a health story. And the IMF has been very clear about this, the amount of GDP growth the world could see if we got the vaccine distributed more quickly. Believe me, that was part of the G7 conversation happening this past weekend.

They made some progress, probably not enough. And the variants are always worrying. And any of this can sort of make people pause and reverse where they are. Certainly, that's true in the UK right now, as we track the delta variant.

But I do think what they saw, both on the shots issue and then on the taxes, was we can make progress together. It is a bit of a return to multilateralism. And six months ago, when Yellen announced the global corporate minimum tax as a key agenda, a lot of people said it won't be possible. This has been talked about forever.

And granted, the G7 is just one small step in a broader conversation that has to include the G20 and the OECD. But it's a significant step. And if they get those billion vaccines out there and they get at the G20 in July an agreement on global corporate minimum tax and get China on board, big ifs all around, wow, that's a pretty big six months from a global economic perspective.

AKIKO FUJITA: And Josh, the other headline coming out of the G7 summit as well as the NATO summit yesterday is this collective response to China. You've got this counter to the Belt and Road, this initiative that's been announced. You've also got this tech council that the US and EU has said they're going to establish to ramp up R&D collectively. I mean, how much of that really changes the dynamic with China in countering their influence globally? Has anything fundamentally changed as a result of these announcements that came out over the weekend?

JOSH LIPSKY: Yeah, it's a great question. So the answer is not yet. And there's always a lot to that announcement, build back better for the world. People have been waiting for a long time to see a counter to Belt and Road.

But let's think about this for a second. Belt and Road has a 10-year head start, projects all over the world, including, by the way, in a G7 country, Italy, which is probably why some of that language might have been even more watered down. So it was a good announcement. But a lot of questions remain of how much money is going into it. Who's funding it? What projects will be funded? And China is well on its way in terms of their infrastructure project. So there's a lot of catch-up to do if build back better for the world is going to be a real rival to Belt and Road.

And on the tech council, same thing, great idea, needs to be done. But the US needs to pass its own China Innovation Act first before it can come to the table and say, this is what we're doing in R&D. Let's match it and collaborate with the Europeans.

So on both of those issues, on Belt and Road and on the tech council, good announcements. But let's see where we are at the next G7. That'll be the test for me if these things are actually in action.

AKIKO FUJITA: On that initiative, B3W for short is what they're calling it, build back better. Where's the battleground? Is it in Africa? Is it in other developing regions? Where should we be looking to see if the US along with its allies is, in fact, making some progress to counter Belt and Road?

JOSH LIPSKY: It's everywhere. It's such a great question. There's no one battlefield. I mean, you can look at other parts of Asia, China's neighbors. You can look at sub-Saharan Africa. But you can even look at Europe, Italy, as I said. Belt and Road is everywhere. And it's also in Latin America.

So the idea where we can counter it first, it has to be countered everywhere. And what I think you're going to see happen is, actually, Japan diving into this and being a leader here. I think they have the most to gain, being in the region. I think they're going to want to invest in this heavily. And that would be a pretty significant statement. So I see it first in Asia being the immediate counter. But you also have to deal in places in your backyard, in Europe, in Italy.

ZACK GUZMAN: Yeah. Japan's got the Olympics too. A very busy year for them potentially if they also get on board with that. But Josh Lipsky, Atlantic Council Geoeconomic Center director, appreciate you taking the time to chat with us.