Discussion of Fed balance sheet “saves them time” for new data, strategist says

Jack Janasiewicz, Portfolio Strategist at Natixis Global Asset Management, joins Yahoo Finance Live to discuss the topics raised during the Fed Powell Chairman’s confirmation hearing and the outlook for inflation.

Video transcript

AKIKO FUJITA: Jack Janasiewicz, Natixis Global Asset Management Portfolio Strategist – Jack, delighted to speak to you today. We’ve heard the Fed chairman say that we need to be humble and a little nimble, especially when it comes to some of these lingering inflationary fears. Brian pointing to a key line we heard from Jay Powell, which is that if we need to raise rates further over time, we will use our tools to bring inflation under control. What did you do with this statement?

JACK JANASIEWICZ: This is, I think, something that Fed Chairman Powell has been talking about for some time. I think how I would simply describe this is the optionality and flexibility that the Fed has tried to say it is ready to demonstrate going forward. If the numbers get hotter, they’re ready to respond to it. If the numbers come in maybe a little looser, or a little easier, a little softer, they’re ready to respond to that.

So the point is, they’re trying to maintain that flexibility, to let the data get to them rather than to make predictions. I think it’s been a little change in the way the Fed has handled it compared to previous Fed’s maybe. But it comes down to the same thing he has said repeatedly – optionality, flexibility. We will adjust as and when the data asks us to.

ZACK GUZMAN: Yeah, Jack, I think it was quite interesting to hear here too, when we talk about the two fronts – the dual mandates over there on price stability and the labor market. And really, we’ve heard Jay Powell talk about how these two play together. I just want to play what he said a minute ago and get your reaction from the other side. Listen.

Jérôme POWELL: Getting the kind of very strong labor market that we want with high participation will take a long time to expand. We can see that participation is advancing very slowly. And to accompany the expansion, we will need price stability. And so, in a way, high inflation is a serious threat to the achievement of maximum jobs and to the long expansion that can give us that.

ZACK GUZMAN: So listen, to me, I mean, that sounds like a pretty patient Jerome Powell, maybe stepping away from the hawkish stance a bit. I mean, how do you listen to the tone he’s using there and maybe put it in context with the market reaction we’re seeing right now?

JACK JANASIEWICZ: And I think it’s spot on, right? Funny – when I was taking notes during the press conference, that kind of segment, I thought, was the key to all that kind of take out, if you will. But you know, I think the Fed’s modus operandi here is a little different from what some maybe expect. And what do I mean by that?

Well, it sure looks like when you look at what’s built into the rate markets, the March meeting is certainly in play. Rate expectations, I think now we’re at 75% for a hike. June is still quite high. But if you look at September and December, they’ve been around a 50-50 flip corner. And they really haven’t budged in the past two months here.

Rate expectations therefore certainly appear to be being pulled forward. And I think that’s going to do the heavy lifting, right? We have heard a lot about the financial conditions. We are seeing a slight tightening in financial conditions as a result of this, which is what the Fed wants. But he’s also trying to save time here. The Fed, I would say, may also be slowing down a bit to let the data roll.

So listen, maybe we can raise rates in March because basically the market is giving them that. But I also think you’re going to hear a lot more about the balance sheet. You’re going to hear about forward guidance and a little more, I think, in a more hawkish tone on that front – sort of maybe letting the markets be a part of this financial tightening.

It saves time because, I think, the balance sheet has less of an impact on the global economy or the US economy than the balance sheet. It saves them time to see how the data is coming in. Maybe we’re starting to relax a bit with the supply chain issues, maybe some of these bottlenecks and labor market issues are starting to ease a bit and that’s giving them a little more time to digest these numbers.

So that kind of, I think, a hiatus that we’re trying to build here, that cushion, that’s exactly what I think you’re hitting here – save your time, let the numbers speak for themselves. But in the meantime, let’s rely on the balance sheet to try to contain inflation expectations.

AKIKO FUJITA: In terms of saving time, you know, you mentioned the supply chain bottlenecks that we monitor. Granted, that’s been a big part of some of the pressure we’ve seen building up on the price side. We heard Jay Powell say today that he doesn’t really mean in a decisive way that things have gotten better. On the contrary, the disruptions we saw during the pandemic simply showed the fragility of the global supply chain.

He seemed to suggest it’s going to drag on, you know, well, potentially, into the second half of the year. What is your point of view on this front?

JACK JANASIEWICZ: Yes, and that’s one of the big wild cards I think when we start to think about how the dynamics of inflation are going to continue to play out. You know, I kind of laugh and talk ironically about the fact that they are in transitional retirement. But if you look at their comments, if you hear what he said today, you look at the Fed minutes, they always refer to the concept of transient, they just don’t want to call it transient.

So the point is, I think they expect that if COVID starts to get under control, as things start to normalize, that supply side of the supply-demand imbalance may start to loosen up and we’ll start to see some of that inflation the impressions ease up a bit. And that’s, again, part of that thesis where I think they’re trying to buy some time for the second half of the year.

Listen, the transient is very definitional, isn’t it? To me, transient just means it’s not permanent. Some people have tried to set an end date for transient, and I think that’s a little misleading. But the point is, part of it is going to go away eventually. Solve COVID, if we get COVID under control, a lot of it starts to clean up.

The question is, how long does it take? And I think that’s sort of the key question because then it becomes a political thing, especially when you think about the upcoming midterm elections. Fed, inflation becomes the political punching bag. And that’s the main risk, I think, here in terms of thinking about that as well.

ZACK GUZMAN: Yeah. I guess, Jack, to end here, I mean, when we watched it, you were taking notes, I was taking notes, we were seeing the markets swaying, the 10 years moving away from that confirmation hearing. I mean, does that change the playbook in your mind in terms of where we’re at? If we see the markets skyrocketing today, could it be, in the near term, a slight trend reversal from the start of the year?

JACK JANASIEWICZ: Yeah. And I think it all comes down to expectations, right? And you know, coming up this morning when I checked, the Fed’s hikes for this year were almost equivalent to four full hikes by the end of the year, three for next year. Lots of talk on many news posting sites, for example, that maybe it would take five or six hikes.

And then you start to hear about the flow of the balance sheet and even sell part of the balance sheet. So, you know, maybe we’re getting to the point where we are at the peak of hawkishness over expectations. I think Powell’s comment today mitigated that somewhat. And so for me, the progressive movement must be even more hawkish than what already exists.

It’s quite difficult, I think, given the context I just described. So, you know, maybe with that kind of more accommodating tilt, if you will, it’ll give the market a little bit of support. Because, quite frankly, I thought that by coming in today we had some pretty hawkish expectations from the markets. [INAUDIBLE] I think we saw in regards to part of the share price from the perspective of [INAUDIBLE].

AKIKO FUJITA: Now, it’s good to have your analysis on the back of the testimony today. Jack Janasiewicz, Natixis Global Asset Management portfolio strategist, thanks you for taking the time.

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