Fed soft landing ‘shy of a miracle at this point,’ strategist says
Yahoo Finance Video
Wells Fargo Head of Macro Strategy Mike Schumacher joins Yahoo Finance Live to discuss Fed expectations ahead of the Fed's September meeting, inflation, rate hikes, ADP private payrolls report, and stock market uncertainty.
Video Transcript
- Investors are locked in on what Friday's jobs report could mean for Fed policy following that hawkish speech by Fed Chief Jerome Powell at Jackson Hole. Our next guest says the comments were a clear signal of the Fed's unlikeliness to ease rates in the first half of 2023. Wells Fargo head of macro strategy Mike Schumacher joins us now.
Mike, always great to get some time with you. So what are your expectations around that September Fed meeting? What do you think the Fed will do, and what do you think they'll say?
MIKE SCHUMACHER: It's leaning toward 75, we think, at this point. And it's interesting. If you had asked this question prior to Jackson Hole, I would have said 50/50, frankly. It's a jump ball. We'll get the inflation data, we'll get the jobs report from the Federal, figure it out.
But Chairman Powell was talking pretty tough a few days ago, and that tells me that the 75 seems like the most likely case. And I think for him, the challenge is to stay on message. Drive home the point. We're going to go 75. We're going to keep on tightening for a while. We are not going to switch course quickly and go from tightening to easing, so just forget about that idea.
Forget about a rate cut, early '23. He's got to keep driving this point home time after time after time. So that's the issue for Chair Powell. Did a good job in this respect at Jackson Hole. He's been kind of iffy previously, so if he stays with the Jackson Hole theme I think the markets are in for a pretty tough ride.
- What does that mean for this idea of a soft landing, Mike?
MIKE SCHUMACHER: Soft landings look pretty unlikely. If you, for instance, focus on unemployment, my colleagues over in the Wells Fargo economics team have it rising to about 5%, let's say, in the next year and a half. So toward the end of next year. That's very inconsistent with a soft landing.
So a soft landing, a lot of things would have to go incredibly well. You'd have to have the energy situation eased, which is probably just shy of a miracle at this point. COVID probably has to be pretty moderate. If you think about a surge this Fall, this Winter, let's say in flu season in the Northern hemisphere. That would have to be, I'd say, pretty benign. Maybe that happens, maybe not.
But a lot of things have to come together. And it seems to us that's a pretty unlikely scenario. So we do think there will be a recession. Maybe not huge, but at least of some sort of next year.
- Well not huge, Mike. Define that for us. Is that slight-- a slight decline in GDP or are you talking something greater than 1%?
MIKE SCHUMACHER: Really, if you look at the aggregate decline in GDP over, call it, two to three quarters. We think it's more likely a three quarter event. Something on the order of 1%, one and a half total. So I would characterize it as a pretty moderate recession. Now if you think about risks, though, you say, well, what's the risk scenario?
Our risk scenario is for the more severe recession. So I mentioned a couple of those things would have to break the Fed's way. What if they don't? So what if you get even a worsening of the energy situation? How does that really stack up in terms of fighting inflation versus keeping economies globally out of recession?
It doesn't work very well. So it seems to us the risk, then, is toward a more unpleasant result.
- Mike, with the data that we got today in private payrolls out of ADP and trying to, as best we can, look forward to Friday's jobs report to see where there may be some overlap in the data that's coming through. What are your expectations? This is a newly revamped report that we know from ADP to try and get past some of the scrutiny of the past, that there was kind of a delineation or perhaps there was this deviation we should mention that is present between the reports previously.
And so is this a new precursor, and what do you expect going into Friday's jobs report?
MIKE SCHUMACHER: Frankly, I ignore the ADP report. It didn't work very well historically. This is a new thing, as you mentioned. So who really knows how it's going to fare in terms of predicting nonfarm payrolls. As far as the report Friday, the thing to focus on from our perspective is earnings, hourly earnings.
The earnings rise 0.3%, 0.4, 0.5. 0.4 or 0.5 would be a pretty tough signal for the Fed. And the big fear for policymakers, whether it's for Jay Powell or whether it's Christine Lagarde, take your pick, is that the idea of wage increases at a pretty high level becomes entrenched.
And that makes inflation very sticky. So focus on the wage number, don't pay nearly as much attention to the payroll's print per se, and don't worry about ADP for probably a good six months.
- If we just tick higher, how do you expect markets to react, considering that for companies that have cited or just summarized some of the headwinds that they're facing as macroeconomic headwinds. With all of that in mind, wages certainly are part of that as they factor it into some of their expense structures-- all of their expense structures.
MIKE SCHUMACHER: Yeah, I've talked to a number of corporate CEOs, CFOs recently. And the takeaway I get is that the labor market is still exceptionally tight. Maybe it's very slightly easier than it had been a few months ago, but it's no panacea. So in terms of wage costs going up, they feel that very acutely.
So I think we need to get at least a few more months of pretty significant moderation before we can say that the labor market is playing ball at the Federal.
- Wells Fargo head of macro strategy Mike Schumacher. Always good to see you. We'll talk to you soon.
