‘I think on balance the Fed is still marching forward’: MacroPolicy Perspectives Founder

Julia Coronado, President and Founder of MacroPolicy Perspectives, joins Yahoo Finance Live to discuss the outlook on Fed tapering, interest rate hikes, and inflation.

Video transcript

- All right, well the Federal Reserve, of course, also in focus this week, as policymakers kick off their two-day meeting today. They're going to have plenty to consider here, from rising COVID cases and higher prices to that unfolding situation in China. Here with more now is Julia Coronado. She is president and founder of Macro Policy Perspectives. Julia, thanks so much for being with us. So do you think that this news we're getting this week about Evergrande in China, might that change the timing or change the equation for the Federal Reserve when it considers when to start rolling back those asset purchases?

JULIA CORONADO: I would say that certainly isn't the base case yet. It looks like it is a Chinese situation that will be mostly contained in China, that any implications for the US are moderate in scope. So far, the correction in the market or the pullback has been nothing to really worry about for the Fed. So I don't think that that's the situation. I think the Delta variant is a more serious situation. That has shown up in US data. Again, not derailing the recovery, but slowing it down and adding some sand in the gears, if you will, interrupting the ability of the return to school and disrupting some global supply chain that were already experiencing difficulties.

So I think, on balance, the Fed is still marching forward. They're going to tell us they're about to taper this year, or they're going to-- their plan is still to taper this year. That sets up November, maybe December as a formal announcement. So this meeting is really not about doing anything. It's just about reminding us that the economy is making progress, the recovery is underway, and the Fed is beginning a very gradual process of normalizing, as they like to say, monetary policy.

- So I know, at this meeting, there's going to be the return of the dot plot, which is the forward-looking forecast for interest rate hikes by the Federal Reserve. What are you going to be looking for in that dot plot, Julia?

JULIA CORONADO: A couple of things. So one is whether there are two to three people that have pulled forward their expected date of liftoff to 2022. So we're going to be looking at whether the median dot shows a rate hike in 2022. The other thing that we'll be looking at is 2024. We get to see what the Fed is expecting in 2024 for the first time, where do they see-- that speaks more to the pace of rate hikes. Most participants expect liftoff at least by 2023. Even if that doesn't change, that change between '23 and '24 will tell us something about how quickly they expect to raise rates once liftoff becomes appropriate.

- I want to get back to the rolling back of the asset purchases and sort of that timeline. There are some who believe the Fed has not been transparent enough, and that when that finally does happen, we could, in fact, see a taper tantrum. Do you believe that, or is that timeline pretty well telegraphed and already baked in for investors?

JULIA CORONADO: I think it's been pretty well telegraphed. I think that the Fed has followed its game plan of really baby-stepping the signals on tapering. We get a little bit each meeting, each release of the minutes to each meeting. And so, you know, it's really going to come as no surprise in November.

As far as pace, they have not been very clear about pace, in part because I think they want to calibrate that to the economic conditions. And the leadership-- Chair Powell, Governor Brainard, President Williams-- these people have told us that they want to gather information as the economy moves into the fall, beyond reopening, beyond the height of the fiscal impulse, to get-- to see what those dynamics look like, and to calibrate their exit from the bond purchases accordingly. So I think that's one reason we haven't seen more information. And I don't expect specific information tomorrow. I think that will come in November, when they make the formal announcement.

- And do you think we're going to get any different language regarding inflation? Because we know Fed Chair Powell has been using that word transient when he refers to inflation for months now. Do you expect that to change at all?

JULIA CORONADO: I don't expect it to change. I do expect him to talk in more detail about what that means in the press conference. He has been-- he did that in Jackson Hole. He devoted nearly his entire speech in Jackson Hole to what does all of this supply chain inflation mean for the inflation outlook, how does he see it, how does he expect it to evolve. I think the summary of economic projections, where they show their forecasts for inflation, will show significantly higher inflation this year, but with little follow-through into 2022 and 2023.

So I think the story is still that the Fed expects this to be transitory. A lot of it is tied to supply chain issues, frictions, bottlenecks. And you know, we're past the peak of those. Even though they might last longer than we previously thought, they do follow a different dynamic than something that is just inherently demand-driven and sort of underpinned by wage growth and labor market dynamics. These are kind of a unique set of circumstances that's tied to the pandemic, and companies are hard at work trying to resolve this.

It's not going to happen overnight, but nor is it something that is necessarily going to mean repeated price increases in things like cars and televisions year after year after year. In fact, at some point down the road, whether that's early next year, late next year, 2023, we're going to be-- have plenty of semiconductors. Semiconductor production will ramp up. That will mean that the competitive markets that we see in autos and televisions and gaming consoles will all return to their normal competitive state, and we will see more normalcy in pricing dynamics. So I think they're just going to have to keep talking about that.

- We're looking forward to that day when we get back to some normal. All right, Julia Coronado of Macro Policy Perspectives, thank you.