The Fed wants 'a space in between’ tapering and tightening interest rates: Analyst

Brandywine Global Global Fixed Income Portfolio Manager Jack McIntyre answers questions on the Fed's asset purchases and how tapering would affect the market versus tightening.

Video Transcript

ZACK GUZMAN: For more on where we go from here, though, in terms of how the market reacts to what we're expected to hear in terms of starting tapering, those words coming out of Jay Powell's mouth here at the 2:30 press conference. That's the large expectation. For more on what the market might do in reaction, I want to bring in Jack McIntyre here, Brandywine global portfolio manager joins us now.

And Jack, I mean, when we're looking at it, we were just discussing the last hour. Obviously, the size of tapering here is something that investors are excited to hear, what exactly the number is going to be in terms of stepping down from the Fed's traditional asset purchases. What are you expecting maybe investors to key in on mostly when we hear it today?

JACK MCINTYRE: So, a couple of things. You know, and I think Powell was unprecedentedly clear in September. He told us we're going to start in November and finish in June. And you can kind of do the math. That probably means we're going to be about $15 billion reduction of asset purchases. I don't think they want to go any stronger than that because you just-- hey, there's a chance that they're tapering in an economy that might be slowing or certainly where we might be moving past sort of peak inflation in here.

So I think the big thing to watch for-- and I suspect Powell is going to do a good job at it-- is differentiating tapering and tightening I mean, I think this Fed, they want a space in between when they finish tapering and when they start tightening. And I think he's going to price in a pretty clear message on that front.

JARED BLIKRE: And Jack, where there is tapering, there's tightening. There's also Powell's potential renomination here. And that's a big wild card. I think in terms of uncertainty, that could be cleared away right now. There are some rumors that he might make an announcement within the next few days that he might not seek reappointment. And we'll have to see if that's true. Probably not going to answer a single question on that subject in the press conference, but how are you handicapping the situation?

JACK MCINTYRE: Yeah, this is a tough one. There's a little bit of roll on the dice here, kind of reading the tea leaves. I personally think he's going to stay. I think the Biden administration, hey, we know they're facing some headwinds. in here, his approval ratings. You look at Virginia governor's race, et cetera, like that. I think, you know, Biden and Janet Yellen probably don't want to do anything that might disrupt the markets in here, I think. So, you know, we're making our investment decision based on the assumption that Powell is going to be around.

ZACK GUZMAN: Yeah, it'd certainly be a wild card. I mean, you think about the stability that was provided for investors earlier on in the pandemic, I don't think a lot of people took that for granted. But Jack, I mean, elsewhere when we're looking at all this, too, right, we were just discussing the changes in terms of how these might impact the sector, the differences there, I guess, in opportunities once this goes into place and the steepening yield curve. Potentially, we see that. I mean, how are you looking at it maybe in terms of the best way to set up and prepare for the opportunities that come in after such a policy change?

JACK MCINTYRE: Yeah, so I think the first thing is-- and again, a measure of success for this meeting is there's not a big reaction in the markets in here. And again, you know, I am a believer. I think tapering is not tightening. And you're still buying assets just at a slower clip right now. And, you know, that still means you are buying assets. So that's still stimulative for monetary policy. And one of the things that, you know, I think fiscal stimulus or further fiscal spending is, it's going to be a little bit more uncertain right now, given kind of the makeup of the outcome of some of the recent elections.

So, I think personally that we are going to see inflation be a little bit more transitory on the good side of things. Services inflation is going to remain sticky. And, you know, housing is certainly going to be a source of inflation. But net, net, I think we're going to get a little bit more stable inflation next year. And growth is going to do better because those bottlenecks are going to work their way through.

So I hate to say it, but maybe a little bit of a Goldilocks economy, meaning you're going to get OK growth, but without the inflation that we've seen over the last year or so. So that should continue to be good for risk assets. In my world of global bonds, that really means some of those beaten up emerging market bonds look really attractive.

JARED BLIKRE: Well, let's keep talking about the bond market then, specifically in the US, though. Just because we've had elevated bond market volatility recently, the MOVE index shooting higher as the VIX, which tracks stocks, goes lower, which one is right?

JACK MCINTYRE: Great question, and I suspect, obviously, they both can be right, but having said that, it's not a surprise to see elevated implied volatilities on fixed income. Look what the market's done. I mean, the market's gotten ahead of the Fed in terms of pricing and rate hikes. I think the market's gotten ahead of itself. I think, you know, again, ultimately, we're all on the same page. We have to see the data, both from an employment standpoint and inflation standpoint, before we really kind of know how things are going to play out.

But I just think markets have gotten ahead of themselves in terms of pricing in too many tightenings next year. It also speaks to the importance of the December FOMC meeting because that's when we're going to get an updated version of the dot plot. And we're going to really kind of get a sense of, hey, what a Fed official thinks in terms of rate hikes for next year, 2023, and 2024.

ZACK GUZMAN: Yeah, and as our handy clock here on the program notes, we're under two hours now away from that key policy decision. So we'll be watching to see what happens there. But for now, Jack McIntyre, Brandywine global portfolio manager, thanks again for coming on here to chat.