The Fed will ‘commit to being sensitive to the market’: Economist

Milton Ezrati, Vested Chief Economist, joins Yahoo Finance to discuss FOMC meeting expectations and inflation outlook.

Video Transcript

ADAM SHAPIRO: Milton Ezrati is chief economist at Vested. We appreciate your being here. And let's start off simple. No one's expecting a big surprise tomorrow from the FOMC, or should we prepare for one?

MILTON EZRATI: I don't think the Feds are in the business of surprising anyone ever. They don't like that. So I don't think we should be worried about a surprise. They may talk about tapering. But that would be the extent of anything they'd say.

ADAM SHAPIRO: And so when they talk about tapering, what they're doing is the discussion to set us up for this is where we'll begin. Would they actually say at a date to start cutting back on the purchases of treasuries and mortgage-backed securities?

MILTON EZRATI: I doubt they'll give us a date. They'll probably say, as they always do, that it's contingent on market events coming up. They'll just say that that's their intention to do if they say that at all. That's their intention. And you will probably get some-- I was going to say leaks, but it's probably not a leak-- some speculation on the part of some Fed presidents, not Fed governors, on when that might start. But I doubt the Fed will commit to a date. It will commit to being sensitive to the market. That's their modus operandi.

ADAM SHAPIRO: And the market, it would appear right now, seems to be ho hum about the whole thing. I mean, the equities are going higher. But when you take a look at the 10-year, the yield is down today. We're back at 1.5%, almost 1.6%. So what-- for the normal average human being, whether that person be an investor or not, how important is the discussion of the taper?

MILTON EZRATI: I don't think it's very important right now. If the Fed becomes frightened of the inflation, right now, Jerome Powell has told us it's temporary. He insists that it's going to lift soon. If he admits he's wrong or that he never admit he was wrong, but if the Fed decides that this needs action, then it will move faster. And that will be a more decisive move.

Right now, even if they begin with the taper, it's important to realize that the Fed is pouring enormous amounts of liquidity into the market, has been for a long time. The most they would do is slow the rate in which they're pouring liquidity into the markets. So from the average investor's point of view, the average joe, it's doubtful that the Fed's going to do anything to change the environment in which people are dealing right now.

ADAM SHAPIRO: And so let's talk about the Fed and inflation because there are two big issues with supply chain constraints perhaps driving prices up. And the fact that even if they do taper, we heard previously from Powell that you wouldn't even have a discussion about raising interest rates until the tapering was complete, at the earliest, mid-2022. So how should we as investors and regular folk interpret what's about to happen with interest rates?

MILTON EZRATI: Well, I think that if the Fed begins to taper, the message to the markets is that perhaps the Fed is concerned about inflation. Perhaps this is not as transitory as Chairman Powell has been saying and others in Washington have been saying. So I think that there will be some anticipation.

I don't think it's going to be extreme, but the more the Fed proceeds with the taper, the more-- then people will anticipate a more restrictive, as opposed to a less accommodative, policy. The Fed is extremely accommodative now. Let a more restrictive policy, and the market will move in anticipation. So even if the Fed doesn't move up rates middle of 2022 or spring 2022, you would start seeing some action in the market sooner, as people anticipate.

ADAM SHAPIRO: You shared with us that perhaps this 2% target in allowing inflation to run higher than that might be silly. And then you apologized to Paul Volcker, a fond memory. If you have to run over someone with your car, it does not help to back over them. Explain what you meant by all of that, especially with this 2% target.

MILTON EZRATI: Well, the Fed seems to be saying that we had a 2% target. We ran under it for a period of time. And as a consequence, we should run over it for a period of time, not to overwork Paul Volcker's metaphor. The-- I just don't understand that. If 2% is the ideal rate of inflation, and the Fed seems to think it is, I'm not in a position to judge that. But if 2% is the ideal rate and you have undershot it for a while, then overshooting it is not going to help. The market and life does not run on a moving average basis. So I don't know what the Fed is about.

And Paul Volcker used that story about running over someone. He was asked when he broke the great inflation in the early '80s, someone said, shouldn't we have a period of deflation to even things out? And that's when he said, if you've run over someone with your car, backing over them doesn't help. If we've hurt ourselves by having too little inflation than the Fed's 2% target, it's not going to help to be higher than the ideal inflation for a period of time. Maybe I'm presuming to dictate to the Fed. And I know they're not listening to me. But I think it's silly.

ADAM SHAPIRO: Lots of people like to comment about the Fed, and you are one who has some credentials to be able to do so. So let's wrap this up with what is it that you will look for specifically from Mr. Powell tomorrow?

MILTON EZRATI: I think the thing is, the beginning of the taper is the most important thing. If the Fed, even if it just reduces the amounts they're buying, I think the numbers-- I may be off base, but I think the numbers were, like, $120 billion a month is what they were talking about the last time they made an announcement. If that number falls, it is the beginning of this process.

I don't think it would yet mean that Powell is saying I was wrong about inflation or something along those lines. But it would mean that the Fed is beginning the process of changing policy. It may take 'til the middle of 2022 before it becomes decisive. But this would be the beginning. And I think the market would take it that way and start anticipating moderately at the start, but then eventually picking up some momentum.

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