Here's what Fed Chair Jerome Powell says about a potential interest rate hike

Yahoo Finance's Brian Cheung breaks down Fed Chair Jerome Powell's recent commentary at the FOMC meeting.

Video transcript

- But first, we've got to take another look at what we heard from Fed Chair Jay Powell yesterday in terms of press conference, in terms of the guidance on tapering, and also the implied guidance on when we could start to see rate increases. Our Brian Cheung, of course, covers the Fed. And he's here with us to break down the big takeaways from the presser yesterday. Brian?

BRIAN CHEUNG: Well, Julie, everything was as expected. No real announcement from the Fed in terms of changing, at least for right now, its stance on policy. Interest rates still at near zero, and no movement on the $120 billion a month pace of asset purchases. But a tweak in the statement that we saw yesterday at 2:00 PM made it clear that, if the economy continues to progress as expected, that a moderation in the pace of asset purchases, or the so-called quantitative easing program, could be in the cards soon. But take a listen to the color that we got added from the Fed chairman, Jay Powell, in the press conference yesterday with regards to quantitative easing. Take a listen.

JAY POWELL: Many on the committee feel that the substantial further progress test for employment has been met. Others feel that it's close. They want to see a little more progress. There's a range of perspectives. I guess my own view would be that the test, the substantial further progress test for employment is all but met. And so once we've met those two tests, once the committee decides that they've met-- and that could come as soon as the next meeting-- that's the purpose of that language, is to put notice out that that could come as soon as the next meeting-- the committee will consider that test. And we'll also look at the broader environment at that time, and make a decision whether to taper.

BRIAN CHEUNG: I love that bit because, for about a half hour after the statement, people were wondering, well, what does soon mean, based off of what the statement was saying. And Chairman Powell's saying right there that the language in the statement says this will be November. This will be November, which is the next meeting from the Fed, in about six weeks. So barring any sort of big downturn in the data that we're going to see between now and then, it seems like the Federal Reserve really teeing up an official announcement of a slowing of its tapering process in just six weeks from now.

Now, another thing I want to point out is, of course, the dot plot projection. A lot of Fed watchers keeping an eye on what we saw as the Federal Reserve's projection for where interest rates could be going through 2024. And when you take a look at those dots, you can see the dispersion is quite wide over the next few years over where rates could go. The median dot for 2022 is actually split.

There are 18 members of the committee. Nine of them see the case for no interest rate hikes by the end of next year, but the other nine see the case for at least one rate hike by the end of next year. So it seems like it could be a toss-up right now for where rates could be headed over the short term. If you take a look out to 2024, the median dot has six to seven aggregate rate hikes through that point in time. But of course, the Fed chairman watering down those projections, saying it's difficult to forecast anything over the next year.

And then one last thing before I shut up here. Of course, a lot of focus on the Federal Reserve's stock trading issues, with concerns over the Dallas and the Boston Fed presidents making multimillion-dollar trades. The Federal Reserve chairman saying that the Fed is undergoing a review of its ethics processes, but said no one on the FOMC was happy to be having that kind of discussion and facing those types of questions in the press conference. But he didn't want to front-run that ethics review, and said that updates would be coming soon.

- Brian, there will be some changes next year to who votes on Fed policy. And I bring this up because there were shifts, as you mentioned, in the dot plot. I mean, do you think investors should be thinking about a more hawkish Fed board next year?

BRIAN CHEUNG: Yeah, well, when we talk about the rotating cast of characters, as you mentioned, it is a salient point that there are 18 members of the committee, but the actual voters, the one that-- the ones that ultimately say which policy decision they want to go with rotates among the 12 Federal Reserve Bank presidents. All the Fed governors, which includes Powell, they have permanent votes, but among the 12 Reserve Bank presidents, only New York has a permanent seat, and then four rotate in.

So right now, the current members of the voting committee are from Richmond, Atlanta, San Francisco, and Chicago. But as you mentioned, once the calendar flips over after the next two meetings, it it'll be a new cast of characters. We'll get Cleveland, Boston, St. Louis, and Kansas City on there. And most people would take a look at that composition and say that might tilt more hawkish than it does right now because you're swapping out some of these more dovish members, like a Charlie Evans from Chicago, like a Bostic from Atlanta, then you're rotating in a Cleveland Fed president who's been historically hawkish, in addition to Boston and Kansas City also perceived to be more hawkish.

But I just want to point out that really, if you're trying to play that kind of musical chairs game here and trying to speculate, well, who's going to be voting for what, again, the data is just moving so fast and the scale of the recovery is just as unprecedented as it was during the downturn in the depths of 2020, it's a little bit difficult to say for sure who's going to land on what side of the spectrum here. For example, St. Louis Fed president Jim Bullard, who is rotating in next year, was perceived to be one of the most dovish people headed into the pandemic, or rather headed into the US-China trade concerns of 2019, but coming in-- out of the pandemic, he's actually become a little bit more hawkish.

So these types of sentiments, they definitely change, although one other point that I should be making is that even some of the permanent voters on the board level could be changing because Randal Quarles will be rotating out as Vice Chairman of Supervision. It's unclear if he's going to stick around on the board after 2021 is over. And then you have Rich Clarida, who's going to be leaving the board in January next year. So there could be some changes there, as well.

- Yeah, so bottom line, might be a little too tricky to try and game all of that out just yet. Might be a little premature. Thanks so much, Brian. Appreciate it.