The Federal Open Market Committee (FOMC) began its two-day policy meeting on Tuesday morning, with Wall Street eagerly awaiting the Fed Dot Plot. Investors now anticipate that the Federal Reserve won't move to cut interest rates after the March meeting, but still debate the number and timing of future cuts.
Federal Reserve Bank of Dallas former president Robert Kaplan joins Yahoo Finance to break down the current economic backdrop and how it impacts the Federal Reserve's policymaking.
Kaplan elaborates on macroeconomic trends: "The economy remains resilient, however. And the job market remains very strong. There's been a little bit of increase in labor supply which is helpful to the Fed, and that's why the unemployment rate ticked up. But the truth is, there's still very strong demand for labor...The big cross current that I think the Fed is dealing with, and they may or may not want to acknowledge, is fiscal spending."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
SEANA SMITH: The Federal Reserve kicking off its two-day meeting today. Now, the big focus is going to be on the central bank's economic projections. Investors right now looking for any clues on the timing of that first rate cut. Traders right now pricing in about a 55% probability that we will see that first rate cut in June. To break this all down for us and what we could expect from the Fed going forward, we want to bring in Robert Kaplan. He's the former Federal Reserve Bank of Dallas president. Thank you so much for being here.
ROBERT KAPLAN: Good to be here.
SEANA SMITH: So let's talk about what we are likely going to hear or see from the Fed this week. There's been so much emphasis placed on economic projections on the dot plot. How many cuts we are going to get between now and year-end? How are you looking at that?
ROBERT KAPLAN: The Fed said in December that they were penciling in three for this year. I still think that's a pretty decent estimate. It may slip to two. But it will be in this neighborhood of two to three. But the most important thing that I think Jay Powell will try to do coming out of the meeting is keep his options open and keep the Fed's options open because there's a lot of mixed data and crosscurrents. And so I don't think he wants to be boxed into any particular month or action, but he wants to leave the options open that if they want to act in June, they can. But also they-- they reserve the right to kick the can a little bit beyond June.
BRAD SMITH: So they've continued to talk about data dependency, and-- and you're giving a nod to the mixed data that we are seeing right now. So where would we see more of a trend be locked in that's in line with what the Fed's targets are?
ROBERT KAPLAN: So I'm much more of a fan of what are the drivers of the data than the actual bouncing ball to data itself.
BRAD SMITH: Sure.
ROBERT KAPLAN: And the drivers-- the two or three drivers I'll mention. The economy remains resilient, however. And the job market remains very strong. There's been a little bit of increase in labor supply, which is helpful to the Fed, and that's why the unemployment rate ticked up. But the truth is, there's still very strong demand for labor. And maybe productivity is improving a little bit. The big cross current that I think the Fed is dealing with, and they may or may not want to acknowledge, is fiscal spending.
We ran a 15% deficit as a percentage of GDP in 2020. We ran another close to 15% in '21. That was due to ARPA. But that ARPA money actually is still not been fully spent. And then you've got the Inflation Reduction Act. And then you've got the Infrastructure Act. And so last year, we ran a deficit over 7% of GDP. In 2019, the deficit was 4 and a fraction. Here's the point. Fiscal spending, I believe, is one of the big reasons the economy's been this resilient, and it's a big reason why the service sector-- inflation in the service sector is very resilient.
We have an aging society. I wish we weren't aging, but we are. And workforce growth is decelerating. And so people are struggling to find workers in the service sector. And I think that-- that makes inflation sticky. And so the Fed, looking at all these cross currents, is trying-- they don't want to move prematurely. It's been a long battle in inflation. We're still at full employment. And so, I think they're going to be patient. and I think they ought to be patient.
SEANA SMITH: Is that enough then to maybe support the argument out there that maybe, in fact, inflation has stalled and will stall around these levels for a little bit?
ROBERT KAPLAN: It's possible. Now remember, there's two big parts of inflation, goods and services. In the goods area, not perfect. We've got pretty good disinflation in goods. It's-- It's the service sector that if there's a stall and it all revolves around workers. Excess demand for workers, not enough workers. And we're seeing-- If we see some stalling or stickiness, it'll be in the service sector. And again, if you're spending on new battery plants throughout the United States, that's the Inflation Reduction Act, new infrastructure projects.
The unspent ARPA money from 2021 is still being spent that increases demand for workers. So there's a lot of sectors in this economy that are-- feel like they're in a recession. Some-- Anything interest rate-sensitive. But this government spending on these projects, in my opinion, is creating a resilient bid for workers. And that may be creating some of the stickiness, which gives-- which may create some of this stalling that you're referring to.
But I don't know, and they don't know. The Fed doesn't know. And so when you don't know, turn over a few more cards and-- and play it out. And they-- And-- And if the unemployment rate were spiking, there would be more urgency to act, but it's not. And so as long as unemployment stays-- employment stays strong, and unemployment stays low, I think they've got the luxury of patience.
