‘By the end of this year we won’t be talking about semiconductor chips anymore’: RSM Chief Economist

Joe Brusuelas, RSM Chief Economist and Sarah House, Wells Fargo Senior Economist, joins Yahoo Finance Live to discuss inflation concerns and economic outlook amid FOMC decisions.

Video Transcript

SIBILE MARCELLUS: But right now, I want to bring in two new guests, Joe Brusuelas, RSM chief economist, and Sarah House, Wells Fargo senior economist. I want to start with you, Joe. Joe, is the Fed achieving its objectives right now of not ruffling any feathers and just staying steady when it comes to its stated policy and objectives?

JOE BRUSUELAS: Well, if you wanted to do that, that's the kind of statement you'd want to craft, right? I mean, essentially, what the Fed's going to say is, look, we just don't see anything that requires us to alter our policy stance right now. We're expecting improvements in the pace of vaccinations and the public health situation, employment, and growth.

Thus, they're signaling there's going to be an improvement in the overall forecast when we get the June summary of economic projections. And let's be honest, the Fed just doesn't see wage push inflation out there right now. All that talk that we've just had to endure over the past 20 minutes, where is the wage push inflation for all you inflationistas? Until we see that-- and it's not there because we have a K-shaped recovery-- you're not going to get the inflation that you're all talking about.

ADAM SHAPIRO: Sarah, I want to pick up on what Joe just said about wage inflation. Because when times were good in 2019, and you can go back 10 years prior, we had, as was pointed out, good employment, but no wage inflation pressure. Why is that going to change, if it's going to change, going forward?

SARAH HOUSE: Well, I think we've actually already seen the labor market turn surprisingly tight in certain pockets. So that's been one of the unique things about this recovery, is, yes, we've had a tremendous loss of jobs. But we've also seen a massive contraction in terms of the labor supply. And so, I think we actually could see at least some modest inflation pressures on the wage front bubble up sooner than we saw in prior cycles, where I think there will be a little bit of friction, as it does take time for people to come back into the workforce, to feel comfortable with the health situation, to get their childcare aligned.

Already, we're seeing wage costs, in terms of the employment cost index, begin to firm somewhat over the past quarter. So it's not nearly running out of control. This is not 1970s inflation by any means. But I do think that we have a little bit more wage pressure than is generally appreciated right now.

ALEXIS CHRISTOFOROUS: You know, Joe, the economy now is opening up in a larger way. We're getting more guidance from the CDC. The country is getting its vaccinations. And as the economy continues to recover, and things start to come back, we are expecting to see inflation heat up. And I'm going to ask you what I asked an earlier guest about comments from Mark Zandi over at Moody's, where he says the Fed's running out of time because the economy is busting out all over. Is the Fed running out of time in terms of rolling back its bond asset purchases?

JOE BRUSUELAS: No, I think Mark and I would agree to disagree on this. I don't think we're going to hear an announcement on potential tapering, probably until the fourth quarter of the year. And then it's going to take them a year to unwind their asset purchase-- current pace of asset purchases. And that really gets us through 2022. So we'll be talking about the embarkation of rate hikes in 2023. I really don't think that meets anybody's definition of running out of time. Look, I'm a little surprised at what I'm hearing here.

You know what I see out there in terms of a labor market that's getting tight? I see a lot of women, who don't have childcare options, who've borne the brunt of the adjustment during this entire pandemic, not being able to go back to work. Look, when the schools reopen in the fall, and you begin to see childcare options multiply, those women are going to stream back into the workforce.

And a lot of that bumper-- a lot of those bumper sticker slogans we're hearing right now about how fiscal aid is keeping people from returning to work, they're going to quietly disappear. We're just not seeing the wage push inflation that one would see if you're going to be, quote unquote, "running out of time." All we're seeing is supplies change, which are constrained due to a once in a century pandemic, are slowly ramping up. Mark my word, by the end of this year, we won't be talking about semiconductor chips anymore because Taiwan Semiconductor is ramping up as we speak.

SIBILE MARCELLUS: And Joe, I want to go back to what you said there about women in the workforce, many having to drop out to take care of their children because schools were closed. And of course, they want their kids to succeed in life and continue to get an education. But Joe, do you think that when schools are all open-- obviously, Biden has given so much money for that-- do you think those jobs will still be there for those women?

JOE BRUSUELAS: Yeah, we're going to ramp up. You're going to see the service sector resuscitate itself after a long winter slumber. Once we begin to see people feel comfortable enough to engage in what I call normal and social economic interaction-- are you willing to sit 12 inches away from somebody in a restaurant? We're getting close to that. Are you willing to get on a crowded airplane and go to a crowded airport? Yes. And as business travel ramps back up, those jobs are going to come back.

Now, are there portions of the small business community that aren't going to return? Yeah, that's going to happen. Roughly about 30%. We're down 30% on revenues. About 39% of the businesses that were open-- that's small businesses that were open prior to the pandemic-- they're not quite reopened yet. So there's going to be some residual economic scarring, but you're going to see the unemployment rate drop to around 4.1% by the end of this year.

SIBILE MARCELLUS: And how much of an impact do you think that's going to have on the Fed? Once we see that unemployment rate, as you said, drop to 4%, do you expect some big changes from the Fed?

JOE BRUSUELAS: Well, no, I don't expect to see the path to policy change in the near term. The only thing I'm expecting is, in the fourth quarter, they will use their opportunities to shape public expectations or investor expectations around the potential tapering of their asset purchase program. That's the $120 billion, $80 billion in treasuries, $40 billion in mortgage-backed securities. That's the next big evolution of policy. It's not going to be policy rate hikes. It's not going to be emergency measures to deal with the non-crisis.

SIBILE MARCELLUS: No, we'll definitely be paying very close attention to that and, also, if the Fed is willing to let inflation run hot for that much longer.