Powell’s tapering remarks are ‘dovish’: Economist

RSM Chief Economist Joe Bruselas joins Yahoo Finance to discuss the aftermath of Jerome Powell’s speech, Powell’s chances of being reappointed, and the latest views surrounding inflation.

Video Transcript

- Well, the long awaited Jay Powell speech just happened. And the markets are greeting it with some enthusiasm here as we see stocks on the rise following his comments in which he seemed to indicate-- although left it sort of loose-- that we could start to see some tapering, but that doesn't mean that rates are going to start to rise. Joe Bruselas is with us here now, RSM chief economist. Joe, just first of all, just give us your first blush reaction here to the comments.

JOE BRUSELAS: Well, Powell nailed it, didn't he? He reaffirmed market expectations that tapering will begin this year, the likely announcement in November, start of operations perhaps as early as December, while he retained flexibility to address risks around the Delta variant. So if that does get worse, they can beat a path back across the bridge, and modestly delay the inevitable, which is the start of tapering of assets.

I think perhaps more importantly, he did reaffirm with a very strong close of the speech that, hey, market guys, tapering is not tightening. Markets interpreting this as a dovish-ish type statement, which is why you see equities falling-- excuse me, equities rising and yields falling, very good tone, breadth and depth appropriate for an academic conference at Jackson Hole from Chair Powell.

- Yeah, Joe, I agree with you, very impressive work by Jay Powell here. Ultimately, do you think this speech and the favorable market reaction to it, is this something that gets Jay Powell re-elected or just reappointed as Fed chairman for another term?

JOE BRUSELAS: Well, my sense is he's got the seal of approval from Janet Yellen inside the Biden administration. And it does look like Powell is going to be reappointed in my estimation. I do think Lael Brainard probably will be put on as a vise chair of regulation. That looks probable to me. They would be well positioned to do this. I mean, the market does trust Jay Powell. His work during the depths of the crisis in 2020 I think earned him another four years.

I don't think the dovish statement though this morning had anything to do with his reappointment. I think it had everything to do with the risks around the outlook linked to Delta, and the two-part definition of what "substantial further progress" means, both inflation and employment. We're not quite there yet on employment.

- You know, Joe, I mean, we've all been focused on when the tapering announcement will happen. And as Brian was just telling us in the last segment, we've got three meetings here for the end of the year. And ultimately, we'll probably wrap up asset purchases sometime next year. So that's kind of settled to an extent. I want to talk about raising rates, and what Powell did at the very end of his speech, where he explicated that the taper is, quote, "will not be intended to carry a direct signal regarding rates". And then also talked about a different and substantially more stringent test for raising rates. Is this sort of a Fed chair maybe working out in his mind a lower terminal rate, a lower neutral rate as it were for interest rates longer term well beyond sort of this immediate period?

JOE BRUSELAS: Well, I think that it's two things. One is that it's the long echo of 2013's taper tantrum. That particular episode left an imprint on the Fed, and they're going to go out of their way to avoid such another policy, policy-induced disruption. Second, look, we all think our star is somewhere close to zero. I don't think this is much of a surprise to anybody who does this professionally. But it did help for Powell to take time out of the speech to reaffirm that the long term neutral interest rate remains very low.

So even when we move towards the time of hiking rates-- I don't think that's till 2023, we're in August 2021-- the market will be well prepared, the Fed is well positioned to use their forward guidance to shape expectations going forward. Hey, one thing I also don't want to let go here, he really did reaffirm what Bernanke always pushed when he was chair. This is all about forward-looking inflation expectations. Right now they're incredibly well anchored if they remain there. That policy is going to be ultimately successful. Time will tell.

- Well, so then, I mean, let's talk a little bit about inflation. Powell saying in the speech sort of what he outlined in, you know, his press conference isn't exactly free-wheeling. He doesn't write down his answers first. Reiterating that most of the inflation is in those reopening-focused sectors, again, reiterating his confidence in that transitory view. As you look at the inflation basket, and we just got PCE this morning, do you feel similarly confident that most acute pressures will indeed prove transitory or bearing out, I guess, to be proving transitory.

JOE BRUSELAS: OK. So my sense is that the worst of the inflation is in the rearview mirror. I think that we've peaked. However, it's going to be a bit bumpy due to the second round of supply disruptions in Asia in general, Southeast Asia in particular. I think some of the things going on, say, in Vietnam in the production of apparel, we'll see that later this year.

But ultimately, if you look at the Fed's core policy variable, core PCE, will be around 3.3, 3.4 by the end of the year, but will be around 2% by the end of next year. Is that a definition of transitory? Perhaps not. But we end up near 2% next year. It's not going to dislodge or cause long term inflation expectations to become unanchored, and the Fed will ultimately achieve its policy goals.

- Joe, you know, I know that the Fed has laid out what its policy goals are. But I guess I'm struggling with what it will actually need to see in order to justify an increase in rates. And on an effective basis, what would happen if they did not for even longer?

JOE BRUSELAS: OK. So I think there's three things here. One is if if they're wrong on inflation being a temporary phenomenon, if it looks more persistent, if it broadens out, then they're going to have to hike rates. Obviously, that's not good for equities, and yields would definitely rise. Second, if there is an unexpected acceleration in hiring and wages well above where they are now, well, they could do that or if financial conditions really get out of whack. You know what though, it looks to me like we're going to find our way through this. There's going to be the up and down in equities markets. I mean, there's a lot of froth out there.

I look at the financial conditions indices just like everybody else it's a little bit elevated, and I think there's going to be some buying opportunities going forward. But here's the thing, when the Fed moved to the flexible average inflation targeting regime, and they all but signaled they were going to begin thinking about things such as economic inequality, and the relationship between climate change and future financial stability, I think the focus on what I would call the real economy is the appropriate policy stance. Now, I know for investors who've been conditioned and, Julian, are common career arcs in our lifetime, policy's really been attenuated towards what's going on in the banking and trading sector.

I think that we've had a very subtle shift. We're looking more closely at the real economy now. And the market and investors are still transitioning into that new policy framework. And I think when we see the speeches this morning, I mean, a monetary symposium titled Monetary Policy in an Uneven Economy really does tell you, I think, all you need to know about the direction of Fed policy, and the policy framework going forward no matter how many people in financial markets may disagree with it at this time.

- Yes, you're right that it does take a certain amount of reconditioning, doesn't it? All right, Joe Bruselas, good to see you. Be well, Joe, RSM chief economist. Great to catch up as always.