Joe Brusuelas, RSM Chief Economist, joins Yahoo Finance Live to discuss the Fed meeting yesterday, the labor market, and where the U.S. economy stands right now.
AKIKO FUJITA: So let's break things down further with Joe Brusuelas, RSM chief economist. And Joe, as Brian noted, a much more hawkish tone here from the Fed chair. Most investors had already circled in that March rate hike, but he seemed to suggest that, in his words, there's quite a bit of room to raise rates. Things could move a little quicker than anticipated.
JOE BRUSUELAS: Well, that's right, but when you take a look at where the US economy is relative to the last-- start of the last rate hike cycle in 2015, Mr. Powell is playing a much stronger hand than what the central bank had. Growth finished the year at a 6.9% pace. That's 5.7% on a year ago basis. The unemployment rate's at 3.9%. It's going to fall below 3.5% by the end of the year. 2015, growth was in the doldrums, right, stuck right at 2%, right? Remember that? And unemployment rate was up in the 5. So he's in a good position to do this.
Moreover, the explicit signaling that the Fed intends to use both its conventional tools, the federal funds rate, and the unconventional tools, the balance sheet, should basically succeed in keeping inflation expectations anchored. And that's the real target besides bringing down inflation of the current policy.
And I've got to tell you, I thought Mr. Powell did a fantastic job yesterday. I thought he calmed the room. And it's going to take a while for the market to adjust to QE infinity, which, unfortunately, too many people buy into each time we have a downturn or a crisis to policy normalization. And that's key. We're going to see the slow, gradual, orderly, and predictable pace of policy normalization. And we're going to start here.
BRAD SMITH: And Joe, that's critical to remember, especially considering how much the Fed had been continuing to talk about and continued to keep in the conversation this idea of transitory inflation, but now very critically making this decision at a juncture to signal how aggressively they may move forward, even in the rolling off of its balance sheet or the more traditional measures that you mentioned there. And so, the pacing of that particularly is going to come into focus, too. And with regard to the balance sheet, specifically, what are you going to be looking out for there and how they're getting that timing right?
JOE BRUSUELAS: All right, so on the balance sheet, I'm expecting it to start probably June or July. We'll see roughly half a trillion dollars roll off this year. It'll start with a phased in rolloff of the balance sheet so as to not shock the markets and then picked up by the end of the year to a $100 billion pace per month. Now that stands in contrast with the $50 billion pace per month we observed between 2017 and 2019.
Then in the intervening years, say, by the end of 2024, I would expect just under $3 trillion to roll off the balance sheet. We won't be back to the pre-pandemic level of the balance sheet, nor should we. The structure of the economy has changed forever. And we've got different growth property-- or different growth dynamics that we're currently experiencing and will be experiencing by then.
So in my estimation, the utilization of both the federal funds rate-- I'm still only expecting three rate hikes this year-- no 50 basis point hikes, three 25 basis point hikes with the risk of a fourth, markets pricing in five as we talk. And then the use of the unconventional tool, the balance sheet, will keep inflation expectations in check. And I've got to tell you guys. If the Fed keeps inflation expectations in check, think the five-year forward breakeven, the Fed's going to obtain its policy objectives over the medium term.
AKIKO FUJITA: Joe, we did get the GDP print for the fourth quarter today. I realize this is backwards-looking data, but 6.9%, much stronger than expected. How much of a moderation do you anticipate coming from the omicron variant? How much of this do you think is better than expected?
JOE BRUSUELAS: Let me do something that too many economists are reluctant to do. You see that smile on my face? That's because we experienced the best growth rate since 1984. That's the Reagan administration. Most of you out there weren't born yet. And the others of you who are out there are probably experiencing a bit of acid reflux that I'd mentioned that. But that's indeed where we're at. Now, obviously, omicron extracted a toll from that growth rate the last couple of weeks of December.
We clearly can see it. I'm thinking we're going to be in that 1.5% to 1.7% growth pace in this quarter, but then we're going to reaccelerate. We'll have about a 4% growth rate by the end of this year. Again, that's more than double the 1.7% long-term trend because we will be seeing a net tightening of financial conditions vis a vis the federal funds rate and use the balance sheet. Of course, the economy is going to slow. And we'll slow it back down to around 2.2%, I think, in 2023.
But growth conditions will remain positive. The unemployment rate will continue to fall, as the Fed focuses on the conditions in the real economy, as opposed to focusing exclusively on the value of equity prices. Now, for some of you out there, that's going to be a hard pill to swallow. But my estimation, that is the absolutely correct policy path we need to be going down now because let's be honest about this-- we're not yet out of the pandemic. And there's still some damage repair to be done, even as the Fed normalizes policy.
AKIKO FUJITA: Some good context there. Joe, we always love having you on the show. Joe Brusuelas, RSM chief economist.