Key takeaways from the September Fed Meeting
Tom Graff, Brown Advisory Head of Fixed Income and Mike Mussio, FBB Capital Partners President joined Yahoo Finance Live to break down their biggest takeaways from the September Fed meeting.
ADAM SHAPIRO: Let's bring into the stream to talk about how as investors, we can start to chart our futures with what we now know. Tom Graff is Brown Advisory head of fixed income, and Mike Mussio is FBB Capital Partners president. It's good to have both of you here.
Tom, let me start with you. We're watching the markets. Hey, the punch bowl is still before us, even if they're going to pull away the asset purchases by mid-2022. Liftoff is still not until we have maximum employment and inflation under control. Are the markets missing something today?
TOM GRAFF: Well, thanks for having me, Adam. Look, I think markets are a little actually skittish on the bond side about the outcome, and euphoric about it on the stock side, so that's a little odd. On the bond side, you're seeing short-term rates rise and long-term rates fall, which indicates that the market thinks that long-term growth may be impaired by near-term rate hikes.
So I think that the market is a little bit pushing back, a little skeptical that the Fed's more rosy forecasts for where CORPC is going to end up are actually going to come to fruition.
- Mike, what did you make of the inflation expectations? Because the Fed saying that they expect inflation this year to be 4.2%, they expect it to slow next year to 2.2%. Does that projection, do those numbers make sense to you? Or do you think they're maybe underestimating what we could potentially see when it comes to inflation?
MIKE MUSSIO: Yeah, I think long run, they're on track with what they've been projecting, which is to be able to overshoot for a while above the target of 2%, because we've been below that for a number of years in recent past. And in terms of the current year, moving the number from 3.4% to 4.2%, I mean, I think that's just an admission that they may be a little bit too rosy in terms of the inflation outlook for the current year.
But there seems to be hope that that's going to moderate and get closer to 2%. But I think that they were saying was above 2% kind of up until, and through, potentially, 2024. So a little bit longer duration, certainly than just transitory stuff. It's going to go right up and come right back down.
ADAM SHAPIRO: Tom, how difficult does it make the life of someone who might be the head of fixed income, to know that we are now facing the end of the asset purchases come mid-2022?
TOM GRAFF: Well, first of all rising rates make it easier for us to make money. So it would be nice if they actually went up. But to answer the question more seriously, look, I think we're now reaching a point where the training wheels are going to come off. You know, from the moment the pandemic hit and the Fed went to zero and opened up the war chest, until now, we've been getting extraordinary support. And also, we've known that nothing was really going to change about that in the short term.
So now with tapering, though they didn't formally announce it, we sort of know it's coming in November. And even we sort of know the timing, that it's going to be over by the middle of next week, as you and Brian were talking about a moment ago-- or middle next year, as you and Brian were talking about a moment ago. That means now anything's on the table. So rate hikes could come after that pretty soon, or they could not be for years to come. So I think we're actually going to have to earn our money going forward.
- Mike, when it comes to the pace of the tapering, how much of that has already been factored into the market, when it comes to at least the reaction we're seeing today? We still have the Dow up over 400 points, S&P up over 1%, as well as the NASDAQ win. Chairman Jay Powell, I think, hinted a little bit more just in terms of the timeline of a potential taper than some investors were expecting to hear today.
MIKE MUSSIO: Yeah. I mean, first of all, we are up, but were not materially up from prior to the 2:00 press release, and then the conference. So I think the market got what it expected. Jay Powell is maybe the most honest and forthright person in Washington, and he's basically saying November, December is very, very likely.
People on the committee think that we're already where we need to be in a lot of instances, in terms of employment figures. He said we don't have to have a blowout number for September employment for them to move in November, a good one would be sufficient. The accumulative kind of progress has been made. And I take him at his word, which is if middle of next year is $10 to $20 billion of tapering a month, starting late this year, and very likely to lead to rate increases in late 2022.
Which is probably OK, right? I mean, this is still a very accommodative-- we tend to forget this when you're in it, and you're so accommodative. But still, even with tapering, we're still very accommodative. We're not as much so month-by-month but rates are still low, they're still buying bonds, there's still liquidity in the system. People still have cash in the banks for 15 months from now, still earning 0%. And they're going to go out and they're going to buy something they either want to buy as a consumer, which would be great for the economy, or they're going to put their dollars and assets where they can get some kind of return.
ADAM SHAPIRO: Mike, that assumes they can get what they want to get. He even alluded to the bottleneck and the supply chain problems. But let me follow up on something in regards to all of this. We had a guest on in the 2:00 hour who said the pace of the taper is going to be very important for markets. So Mike, how will markets look at this? Will they look at this as a hawkish move? Is this a dovish move? Or is this kind of like porridge, oatmeal without any brown sugar, just kind of bland?
MIKE MUSSIO: I think $10 to $20 million is-- billion, excuse me, add some zeros there-- is baked in to start at the end of the year. Any less than that would be more dovish from the market is expecting, and more than that would be more hawkish.
- Tom, what did you make of the employment comments that we got from Chair Powell? He was saying that he expects more rapid gains in employment as efforts to contain the virus pay off. This is something that I think a lot of people have been waiting to see significant bounce back, when it does come to the labor market. And then of course, we do have the issue of the shortage here in terms of workers. What's your reading just on the rebound that we are seeing currently, and what we should expect to see in jobs over the coming months?
TOM GRAFF: Yeah, I think that statement was had two meanings to it. One, an immediate reaction to the weaker-than-expected August report, was overwhelmingly those kind of service jobs that were most pandemic-affected disappointing. So I think partially, he was dismissing the August report as not reflecting kind of an underlying weakness in labor demand.
Beyond that, I've got to think that behind the scenes, the Fed is pretty worried about the slow pace of labor supply recovery. So labor force participation is still far below where it was at the beginning of 2020, so pre-pandemic. And one would have thought, with how robust wage growth is coming in, how desperate employers are to hire, that all these folks that went on the sidelines would be coming back.
And now, particularly in this month, we've seen the final expiration of enhanced unemployment benefits. And the best rapid information we're getting is that that's not really making a big difference in willingness to re-enter the labor force. So what that suggests is that the peak growth of the economy, peak sort of productive capacity, the economy is closer than the Fed would like. And it probably means that inflation is also more persistent than what Powell is ready to admit right this moment.
ADAM SHAPIRO: Tom, I'm glad you brought that up, so let me follow up with what you just said. There was a question during the press conference about real wage increases are falling at a pace below inflation. But the September jobs report is going to be crucial. We'll get it on October 1st, Friday. And one issue that may have kept people from going back to work was, my kids aren't in school, so I got to stay home. That's now gone.
You're involved in fixed income. You've just laid out the scenario by which the Fed is looking at inflation, but they're going to get that job number. The hawks are going to see, perhaps, a better movement towards full employment, and that gets them closer to liftoff. Isn't that a risk of what you're trying to strategize for your client?
TOM GRAFF: I think there's a risk to rates moving higher regardless. Meaning if employment growth is robust, because those maybe school-aged parents are returning to the labor force, then that will make certain members of the FOMC more comfortable with hiking sooner. And if that doesn't happen, and wage growth is fueling inflation, that will make the Fed more likely to hike sooner. So I think it's a rock and a hard place situation, Adam.
ADAM SHAPIRO: Tom and Mike, we appreciate you're talking about this Fed statement with us. Just want to point out to everybody that Tom Graff is Brown Advisory head of fixed income, and Mike Mussio is FBB Capital Partners president. Good to have both of you--