Inflation: The Fed is ‘moving toward being more proactive,’ economist says

Michelle Girard, NatWest Co-Head of Global Economics, joins Yahoo Finance Live to discuss the jobs report and Fed Chair Powell's remarks that tapering may accelerate despite Omicron concerns.

Video transcript

JARED BLIKRE: And we want to get back to that jobs discussion. We have Michelle Girard, NatWest co-head of global economics here. And Michelle, great to see you as always. Let's go over these numbers. The market is kind of taking this as a risk off. I'm looking at the payroll number, 210,000, big disappointment there. Street was expecting 550,000. But meanwhile, the unemployment rate ticked down to 4.2% from expectations of 4.5%. And then you look at hourly wages, missed expectations a little bit. But still, 5% year over year, how are you seeing this?

MICHELLE GIRARD: Yeah, well, Jared, you said it exactly right in the sense that those overall headline numbers, whether it's that job gain or the hourly earnings numbers both a little bit light, if you will. But then, digging just a tiny bit deeper below the surface, actually, a lot of really positive aspects to the report. First of all, even with respect to the overall job gain, we had a pretty healthy pace of upward revisions from the prior two months. So the good news is we actually had more hiring than had taken place coming into the holiday season than we had anticipated.

More importantly, in the household survey that-- the survey by which they calculated the unemployment rate, you noted the drop in the unemployment rate. Great news on-- good news, let's say. We still have further to go on the participation rate, more people coming back in, looking for work. And even their measure within the household survey of employment very volatile, but was up over a million. So there-- and also, we saw evidence of people working longer hours, so, again, more activity. So, again, the details of the report were better than that headline-- that initial headline numbers would have perhaps suggested.

KARINA MITCHELL: Overall, it seems like it was actually fairly positive if we take away that headline number. And I'm wondering, what does the Fed think of this report? And what number are they looking at most closely? Is it that headline number? Is it labor participation? Is it wage growth? One thing that they were also very interested in was making sure that unemployment among minorities was reduced, and that did actually happen.

MICHELLE GIRARD: Yeah, I think they're going to be encouraged by the details within the report. As you said, the fact that we're seeing a broad-- the broad groupings of individuals that are benefiting or seeing improvement in the labor market is very important. We know they've been watching the participation rate very closely, so that's good news. And again, if you kind of look through the noise of from month to month, the volatility and the data, the trends in employment, you know, roughly over 500,000 per month on average still look quite healthy. So I think they'll be encouraged.

I would also say another report we had out this morning on activity in the services sector also very strong. It hit a record high with good information in terms of new orders and employment within that survey. So I think the Fed is going to feel confident enough to continue. It's very focused on inflation, almost more so than activity at this point. So I think they've been setting the stage for perhaps moving more quickly to pull back on some of the accommodation. I think this probably keeps them on course for doing that next week.

JARED BLIKRE: Well, Michelle, I want to talk about inflation here because that's been kind of the pivot, if we can call it a pivot, that Powell made earlier this week when he was talking in front of Congress with Treasury Secretary Janet Yellen. I'm looking at CPI expectations for next week. And this is blowing my mind-- 6.7% year over year, expecting another monthly gain of about 7/10 of a percent. When is this going to-- how high can this go? And what does this really-- is this responsible for the fear in Powell's eyes that maybe I'm just reading into?

MICHELLE GIRARD: No, I think you're right. And that's kind of what I was alluding to. I think almost for the Fed now, more important than the growth side, and as long as the growth numbers are not overly alarming or worrisome, and this morning's report wouldn't suggest that, then I do think their primary concern is on the inflation developments.

The removal of that transitory characterization of inflation, and as you said, expectations for the CPI next Friday turning in another high print, I think the Fed is very concerned now about just overstaying their welcome. They've wanted to move slowly. They want to ensure that the economy is on solid footing. But they don't want to get behind the curve in terms of inflation. And particularly, you know, we're starting to see evidence of inflation fears and inflation expectations rising. And, you know, people start to expect that inflation is going to persist, that that can become a self-fulfilling kind of prophecy.

So I think, you know, what we've seen is the Fed moving toward being more proactive. And as I said, I think next week, we'll have confirmation of the Fed stepping up or accelerating this-- their removal or their taper, their pulling back of the purchases and in terms of assets. And that will set the stage for potentially rate hikes in the middle of or later next year.

KARINA MITCHELL: Well, you know, that's interesting that they'll be celebrating, you know, their sort of achievements and where they've come. The IMF today also urging the Fed to speed up its policy tightening amid mounting inflation fears. So what actually does happen at that next Fed meeting? What do you think they do? Do they accelerate the pace that they're unwinding by? And do we hear anything about rate hikes? I mean, the IMF said that central banks must be clear in their policy to avoid market mayhem.

MICHELLE GIRARD: Right. Well, I think-- I expect that they'll accelerate the unwind of the purchases. And I think that that's become a bit of a consensus view. So the markets should be able to take that in stride. You know, the Fed may try to soft pedal the rate hike talk in the sense that, you know, they don't-- they want to know-- they don't want to unsettle the markets by sounding too aggressive because they themselves are not convinced yet of the timing.

But I do think we'll have evidence in their so-called dot plot, if you will. That's their-- that's where they reveal kind of their expectations for rate hikes. Even away from what the chairman says, those dot plot-- those numbers show what the committee members expect, that dot plot right there, what it expects the funds rates to be at the end of each year.

And it's been at the last meeting kind of very evenly split between whether or not they would hike in '22 or in '23. And I suspect that will start to shift forward so that you'll have more FOMC members suggesting that they believe that most likely the Fed will end up raising rates before the end of 2022.

JARED BLIKRE: Yeah, Michelle, just thinking about 2022 then, we have year end outlooks pouring in, or year end-- excuse me-- look aheads pouring in right now. Most of them have a giant asterisk on them-- as you can imagine, COVID, omicron, et cetera. But what are you thinking about the new year?

MICHELLE GIRARD: Yeah, no, our expectation's that the economy continues to perform well. The expectation is that demand remains quite healthy. Supply concerns and constraints, I think will ease not quickly, but they will ease over the course of 2022. So, you know, from my standpoint, that's been one of the biggest restraining factors, actually, behind economic activity. It's more about a lack of supply than a lack of demand. So I-- we're quite upbeat about growth in 2022.

And on the inflation side, you know, that's really, as I said, where the focus is. And we have felt for a long time inflation was not likely to be transitory. And even with that view, we ourselves have taken up our own forecasts for inflation. We look for the underlying or core rate of inflation, you know, by the end of next year to still be above 2 and 1/2% on the Fed's preferred measure, the core PCE deflator. So this is consistent with the Fed needing to take action and raise interest rates. And we expect that to happen in the-- kind of around the fall of 2022.

JARED BLIKRE: Well, I hope Powell is listening. We're going to have to leave it there. But thank you. Great to see you as always. Michelle Girard, NatWest co-head of global economic--