‘Investors should position for higher yields’: Strategist

Zach Griffiths, Wells Fargo Senior Macro Strategist, joins Yahoo Finance to discuss the markets reaction amid FOMC news and the Fed’s decisions on asset purchases.

Video transcript

ALEXIS CHRISTOFOROUS: Let's bring in Zach Griffiths. Now he is a macrostrategist, senior macrostrategist at Wells Fargo. So, Zach, were you surprised that the Fed today was very transparent forecasting two rate hikes sooner rather than later and more aggressively, two of them in 2023, but yet made no mention of starting to taper those bond purchases?

ZACH GRIFFITHS: Thanks, Alexis. Yeah, it's certainly an interesting dynamic. And I think the move in the 2023 median dot was larger than most had anticipated. And you're seeing a big reaction in the front end in the belly of the curve.

But, yeah, as we expected in the forward guidance, at least in the policy statement around asset purchases remain the same. And no changes there is consistent with our view that the Fed is going to wait until the December meeting of this year to announce the taper for it to actually commence in early 2022. So no taper yet. And that's been something that we've been focused on for a while.

ADAM SHAPIRO: Zach, if there's no taper yet, are we seeing an overreaction? And I know markets tend to overreact on Fed days, but is this an overreaction that we see on the selling in equities?

ZACH GRIFFITHS: Well, it's certainly interesting. I think equity is responding to the big increase in policy rate expectations, both in 2022 and in 2023 relative to what the market seemed to be expecting is not overly surprising in the sense that it seems like the Fed is willing to tighten policy down the road more quickly than they had been previously. It's interesting when you look at the dots relative to the adjustments they made to their economic projections, huge increases in the GDP rate and PCE and core PCE in 2021. But out in 2022 and 2023, very small changes, if any. So you have the median dot moving higher, but they're really sticking to this transitory inflation story with this summary of economic projections.

- Yeah, Zach, we were talking to Andrew Levin just a couple of moments ago. And he doesn't exactly see everything the way that the Fed does. But, of course, the primary advice we always hear given to investors is do not fight the Fed. So how should they be approaching the markets, their portfolios with an eye on not fighting the Fed, but also considering that so many folks out there do not necessarily think right now the Fed is getting it right?

ZACH GRIFFITHS: Yeah. It's a difficult situation to balance. And we remain in the bond bear camp. So we think that investors should position for higher yields. It's been a tough camp to be in for the past couple months, as yields have come down.

But we think the fundamental story is really still there with very heavy treasury supply and a very broad economic reopening globally, unlike we've seen in recent history. And our colleagues in economics call for GDP growth, the top 8% this year. So we think with rising inflation, heavy supply, and this economic recovery that's really global in scale is going to push yields higher for the remainder of the year.

ALEXIS CHRISTOFOROUS: Zach, back to the no taper announcement quite yet. We've got the housing market at all-time highs, feverish growth, and speculation in that industry. Yet, we still see the Fed buying $40 billion of mortgage backed securities each and every month. Do you think that that is smart, given the, the backdrop right now?

ZACH GRIFFITHS: That's a great question. And we think that when the Fed thinks about monetary policy, I don't think it's going to address MBS in the sense of tapering MBS before treasuries. But when it does decide to taper, we could see them tapering MBS at a slightly quicker rate than treasuries as a way to cool off the mortgage market, cool off the housing market a bit. As you've said, we have seen tremendous growth in housing and markets remain hot really across the nation. So that's something we can see them doing, but we don't think that they would address MBS without addressing treasuries from taper perspective.

- All right. Zach Griffiths. Wells Fargo senior macrostrategist. Thanks so much for joining us.