‘The Fed is not terribly worried about the growth outlook’: Economist

Sarah House, Wells Fargo Senior Economist, joins Yahoo Finance Live to discuss inflation, GDP growth, and prospects of Jerome Powell retaining his position as Chair of the Federal Reserve.

Video transcript

ALEXIS CHRISTOFOROUS: I want to bring in Sarah House now. She is Wells Fargo's Senior Economist. Sarah, thanks for being here.

So the Fed signaling that it could start reversing its pandemic stimulus as early as November, also that it could raise interest rates as early as next year. What's your initial reaction?

SARAH HOUSE: Well, I think in many ways this is a stronger statement and a stronger signal of reducing accommodation than might be expected given some of the growth headwinds that we've seen and the markdown of GDP growth but also reflective of the stickier inflation environment that we're seeing. I think we've seen the Fed acknowledge through its summary of economic projections and the modest tweaks to the statement that they are coming around to the view that, even as bottlenecks eventually ease, this elevated inflation environment is going to be sticking around somewhat longer than I think they initially anticipated.

ADAM SHAPIRO: Wanted to ask you about the dot-plot revisions to GDP and projected growth. Any surprises there, the downward revision, or is it just because of what they said in regards to COVID slowing down the recovery? Should we read into what they're doing there or not?

SARAH HOUSE: So I don't think you should read too far into the downward revisions for GDP this year. So some of that came from just the BEA's revised estimates for the first half of the year, and then some of it's just been the most recent data. So that's not a surprise that we did see those downgrades to GDP.

I think when you're looking at the statement and the summary of economic projections in its entirety, the Fed's not terribly worried about the growth outlook. So even with those downward revisions, we're still well above trend this year and next. Seems like we're going to get a little bit of catch up in terms of growth in 2022. And so I think the Fed overall is still very constructive on the outlook, which fits with this idea of somewhat early removal of accommodation, whether that's the announcement of tapering in November or the dots moving up a bit both for 2022 and 2023.

ALEXIS CHRISTOFOROUS: You know, we've been getting some criticism of Jay Powell, who we know his tenure is going to be over early next year. We'll have to see whether or not the Biden administration keeps him in his role. But we heard from Senator Pat Toomey of Pennsylvania this week who said that the central bank may have to take, in his words, severe action unless it tightens policy soon. What's your take on that, and also what's your thoughts on whether or not Powell keeps his job beyond January?

SARAH HOUSE: Well, I think we've seen broad support for Chair Powell on both sides of the aisle. And I think, in many ways, he's the path of least resistance in terms of versus getting someone new in there or perhaps elevating Governor Brainard to that chair position.

And so I think our base case is that Powell will get the nod again. And so I don't think, you know, that when you consider some of the upcoming vacancies, it doesn't really change the outlook for how the FOMC as a committee might alter the course of policy versus what came out today in the dot plot.

And then in terms of the Fed and looking at inflation, I think they really are trying to keep some optionality involved. So they've made pains to divorce the concept between tapering and the fed funds rate, and you've heard some folks like Rob Kaplan, for example, discuss that the faster that we wrap up the asset purchases, that actually might us allow us to hold off on the fed funds rate later on.

So I still think that, in terms of rate hike, there's quite a bit to be seen. Even as we saw those dots drift higher, you know, this is no means a done deal that we could get a rate hike in late 2022 or even very early 2023. There's still a lot-- there's still a lot that could happen.

ALEXIS CHRISTOFOROUS: Goodness knows that is very true. Sarah House, Wells Fargo's senior economist, thanks so much.