How inflation reflects the health of the labor market
Brian Jacobsen, Wells Fargo Asset Management Multi-Asset Strategist, joins Yahoo Finance’s Sibile Marcellus and Alexis Christoforous to discuss outlook on economy and the market amid FOMC meeting.
Video transcript
SIBILE MARCELLUS: Fed chair Jerome Powell will be speaking in about a half an hour. And any minute now, we'll be getting the FOMC statement and get their decision. Now this meeting is super important because it could be the last one before the Fed sets the stage for rolling back the extraordinary measures that it undertook last year to deal with the pandemic. I want to bring in Brian Jacobsen, Wells Fargo Asset Management multi-asset strategist. Brian, what are you expecting in terms of that FOMC statement?
BRIAN JACOBSEN: Yeah, this is one of those meetings that hopefully they're still doing by Zoom because they could actually probably just do it via email, instead of actually meeting in person and wasting all that money, mainly because we're not expecting a lot. This meeting is not one where they're going to be updating their forecasts. You get that every other meeting. So they have eight meetings a year. And just at the last one, they updated their projections, a little bit more optimistic.
And so this one, it's more about tweaking the language around recognizing that we had a very good payrolls number. But they want to strike that optimistic tone to keep people's hopes alive. But they don't want to sound too optimistic where they think that investors start thinking that they might take the punch bowl away, so to speak. So, it's actually I'm more interested in listening to Chair Powell's press conference because the statement itself might not really make a lot of changes.
ALEXIS CHRISTOFOROUS: Yeah, that's what we can sometimes get fireworks, right, Brian, is during that Q&A session. And you can bet that he's going to be asked about inflation, which has been picking up. We're seeing commodity prices help fuel that at the wholesale level certainly. And sooner or later, it's going to happen at the consumer level. Do you think that the Fed is right in letting inflation run a little more hot than it normally would before it actually starts to take some real action?
BRIAN JACOBSEN: Well, as far as the inflation picture, as long as it's around 2%, I think investors are pretty OK with that. Looking at longer term projections as embedded in different tradable instruments, let's say a 30-year Treasury inflation protected security, investors seem pretty comfortable with this 2% inflation target that the Fed has. And the belief is that they're not going to deviate from that too much. So should they have some sort of, like, catch-up in inflation?
And that's where I think it gets a little bit more questionable, except for when you take that step back and realize that a good chunk of inflation is actually from services. And a lot of services, that really reflects what's going on in the labor market as far as with wages, right? If you think about when you go out to a restaurant, if you go out, if you're doing any traveling, labor costs are a good component of that inflation bucket. And so if you're not seeing inflation rise, maybe it's indicating that things aren't quite as healthy in the labor market as what you might otherwise be led to believe.
SIBILE MARCELLUS: And Brian, you mentioned the Fed having to walk a really tight rope here. Do you expect them to, of course, acknowledge the US economy's recovery, but at the same time, what kind of language will they pick? Because at the same time, we still have a long way to go. And the labor market, we're still seeing high unemployment there.
BRIAN JACOBSEN: That's correct. And I think that's what Chair Powell is going to emphasize, is that while the economic data is improving, it still has a long way to go before you can consider that the patient is out of the recovery room, right? We went from the emergency room to the recovery room. And then we're going to have to go through some rehabilitation.
And so the patient really isn't out of the recovery room quite yet. Then they want to see the patient, the economy, and the rehabilitation room. We're going in for physical therapy and the such. And then it can be sort of business as usual. So I think that's the-- what Chair Powell is going to emphasize, is that there's still a long ways to go. There is a big divot that was caused by the coronavirus crisis. And the economy really hasn't yet filled that in yet.
ALEXIS CHRISTOFOROUS: I think most on the Street, Brian, will agree that today is expected to be sort of a non-event for the markets. But what could Chair Powell say that might move the markets in either direction today?
BRIAN JACOBSEN: Well, I think that if he gets too specific, right? He's been very vague about when might tapering occur, when could they hike rates. He's been talking in very qualitative terms about what they want to see with inflation, what they want to see with growth. And so, if he starts getting more specific, that's where investors are really going to tune in. And that could surprise to the upside or the downside, depending upon how he wants to try to quantify it.
Richard Clarida on the Federal Reserve Board has been pretty specific. He's like, hey, we want to see about 12 months in a row of inflation above our target. Not too much above it, but about 12 months in a row. And then we can really maybe consider starting that tapering process, reducing the asset purchases. So if Chair Powell confirms that or gives a specific number around that, like 12 months or six months or whatever it is, that's where I think that that could really move markets.
SIBILE MARCELLUS: Well, we'll definitely be paying close attention. Brian Jacobsen, thanks so much.
