Rate Hikes Won’t Come Until ‘Probably the First Quarter of 2023′: Economist

RSM Chief Economist Joe Brusuelas joins Yahoo Finance to discuss the recent FOMC meeting and the upcoming October jobs report.

Video Transcript

ADAM SHAPIRO: –but you might consider that we’ve got a Washington, DC Oreo here. We had the data from the Federal Reserve yesterday. We get jobs numbers tomorrow. To help us make heads or tails of what’s actually happening, we bring into the stream Joe Brusuelas. He’s RSM chief economist. And he’s one of those people you should know that reporters often call when we’re not in the stream and say, help, help us understand this because we don’t. Joe, it’s good to see you.

JOE BRUSUELAS: Good to see you too Adam. Glad to be here.

ADAM SHAPIRO: In your most recent note to your clients, you talked about what the Fed is doing and other central banks. And you said, talk like a hawk, act like a dove. Watch what they do, not what they say. Help us understand what you mean by all that.

JOE BRUSUELAS: Sure. Traditionally, when we’re exiting these long easing cycles that are associated with recessions, central banks want to proceed cautiously. They begin to talk like hawks to reinforce their credibility, shape market expectations, and most importantly, shape inflation expectations. But they tend to proceed very cautiously. And they don’t really begin to normalize policy, often, for a year or more.

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And I think we’re in one of these situations where we’re approaching that. Madame Lagarde this week went out of her way twice to smack down market sentiment around a near-term rate hike. The Fed yesterday, masterful performance by Jay Powell. I mean, tour de force, highest marks possible where he did, he talked like a hawk. But he’s acting like a dove.

And of course, the not so big surprise for me, but for many, the Bank of England holding on its policy rate and not altering the pace of its QE purchases. So the major central banks are clearly in no hurry to normalize policy.

SEANA SMITH: And Joe, we heard from Jay Powell yesterday, saying that it would just be simply premature right now to raise rates. From your gauge, from the data that you’re looking at, I guess, when do you expect us to see a potential rate hike?

JOE BRUSUELAS: Well, I’m not expecting one, really, till December 2022 at the earliest but more probably, the first quarter of 2023. My sense is that we’re not yet at full employment. There is a real debate that needs to be had about what full employment– or how we’re going to define that in the post-pandemic economy.

But nevertheless, the Fed’s not there. And I don’t think, A, they’re going to move to hike rates for a good six months until after they’ve ended their tapering operations, and B, until they’re very comfortable we’ve established what full employment is and we’re at it here in the United States economy.

ADAM SHAPIRO: Joe, one of those questions that a lot of us need assistance understanding is, we’re going to hear a lot of arguments about the Fed balance sheet, which is– is it over 8 trillion at this point? What does this mean, though, if they just hold all of that? Or do they slowly unwind that? And does it take decades to get back to what we might have known before the Great Recession?

JOE BRUSUELAS: We’re not going back to where we were before the Great Recession. That won’t happen in your career arc. So just put that out of your mind. The balance sheet is a very large, effective, and very important tool.

It tends to damp rates along the maturity spectrum on the curve, especially out along the curve. And it’s what is causing some of the risk-taking. Right now, you can’t buy in fixed income. You have to be in stocks.

So how does this work? With a balance sheet that size and the Fed planning to reinvest the maturing proceeds of assets that they own, that in itself is accommodative and stimulative. So even as they end their tapering operations, they’re still going to remain quite accommodative, both in terms of balance sheet policy.

And of course, once you adjust the nominal rate for inflation, you’ve got profoundly real negative interest rates, which in and of itself is accommodative.

SEANA SMITH: Joe, when we talk about this recovery, of course, one of the big headwinds facing us right now are these supply chain disruptions. Do you think they’ve proven to be a bigger roadblock than maybe what the market had initially been anticipating?

JOE BRUSUELAS: Well, of course, we all got that wrong. Essentially, the delta variant, the fourth wave here, the first wave through much of South Asia, really was the final hammer blow that knocked the just-in-time global supply chain offline.

While it does look to me that it’s improving, and maybe we’ve made a little bit too much of this, it’s not going to be what it once was this year. It’s going to be later next year before we have a real good assessment of what’s happening.

Let me say one thing here. I’ve been really trying to go to the stores. I travel a lot. I’m not seeing the empty shelves that everybody’s talking about. And Bank of America released some really interesting credit card data today. Spending is off the charts. Sure, it’s got to do with higher prices. People are buying something. I want to know what they’re buying and where they’re getting it.

What we’re hearing from clients, they’re switching from shipping to air transport. They’re changing the composition of packaging where there’s a little bit of risk of losses, but they want to get it there. I think there’s something happening here that we’re not catching in real time. And I’m becoming more skeptical day by day that those empty shelves around the holidays, that’s probably more talk than reality.

ADAM SHAPIRO: You’re ruining a lot of nights for newspaper and TV editors who you try to hype and scare everybody. Let me ask you this. Tomorrow, we get the jobs number. Whether it’s a surprise to the upside or to the downside, is the Fed going to be much– are they going to be moved much by what they see, or are they going to stick to their dot plot?

JOE BRUSUELAS: OK, so they’re watching this really closely. Now, I expect a total change in employment of 475,000 and a decline in the unemployment rate by 1/10 of a percent.

Now, what the Fed’s watching here, this is really important. They’re looking for the beginning of the trickle back into the workforce of prime age females, 25 to 54, who bore the brunt of the adjustment during the pandemic. They are the ones who suffered the greatest loss in jobs.

Second, when you see the unemployment rate decline below 5% like it is, that’s typically when we began to see retirees trickle back in the market. And those who’ve been out of the workforce start to show up for new jobs because wages are going up. They clearly are. And they’re clearly going up downmarket.

Now, one final thing before I get back to you, we’ve had this big debate about where all the workers are. Our friends in St. Louis Federal Reserve, I think, solved part of the puzzle. Turns out during the pandemic, 3 million more Baby Boomers retired than the trend rate that would suggest prior to the pandemic. Now, that’s 60% of the 5 million missing workers. So the Fed is really going to watch these things closely, prime aged women 25 to 54, see what their employment to population ratio is and labor force participation rate.

And then any hint of retirees, especially those who haven’t filed for Social Security, beginning to come back into the workforce and take advantage of the higher wages, now, we won’t see that in real time. That’ll only be in the rear view mirror. So we’ll have to watch Fed rhetoric very closely for the next six months.

ADAM SHAPIRO: In fact, there’s an article I think “Bloomberg” has about the boomerang, the people who’ve retired but are now going to go back to their old jobs, different circumstances.

JOE BRUSUELAS: Now that would be great. If we see that, well, the market would just absolutely adore that, as would the Fed. I would be happy. I don’t even care what the top line is if we see that boomerang effect going forward.

ADAM SHAPIRO: We’re going to keep our eyes open. Joe Brusuelas, RSM chief economist, always good to see you. Thank you for joining us on Yahoo Finance.

Source: https://finance.yahoo.com/video/rate-hikes-won-t-come-231822273.html