There’s great uncertainty about labor force participation rates: Economist

Calvin Schnure, Nareit Senior Economist & Former Federal Reserve Economist and Jeanette Garretty, Robertson Stephens Wealth Management Chief Economist, join Yahoo Finance to discuss the Fed’s asset purchases, inflation projections, the labor market.

Video transcript

KRISTIN MYERS: We're joined now by Calvin Schnure, Senior Economist at Nareit and a former Fed economist. We also have Jeanette Garretty, Chief Economist at Robertson Stephens Wealth Management. So Calvin, I'm going to ask you this question given your time at the Fed.

Has the Fed created right now this monster of easy money, even in this announcement not even talking about talking about tapering, they're keeping interest rates where they are currently? And how difficult is it going to be to slay that monster of easy money, considering this environment that we have been in for so long?

CALVIN SCHNURE: Well, there's a different way of looking at their asset purchases. And you've got to think, the Fed's got three policy objectives. And people normally talk about the first two-- full employment and price stability. But they're also interested in financial stability.

And what they're doing with these asset purchases, so making sure there's plenty of liquidity for the banks, for the financial system so we don't have something like happened last March, so that we don't have some of the dislocations we had in 2008, 2009, so what they're really doing is helping secure that the financial system can keep the economy on a steady track. And that's-- that's really important. You can't achieve either of the other objectives without that goal.

ADAM SHAPIRO: Jeanette, these-- these inflation projections that we're getting from the summary of economic projections, I mean, some people may not be old enough to remember 3% core PCE from 1990. I think that was the last time it grew that fast. But from an investor standpoint, on one hand, we're seeing this in the dot plot and the SEP. But on the other hand, the statement is saying pay no attention to that man behind the screen. What are we missing?

CALVIN SCHNURE: Actually, if you look at the--

JEANETTE GARRETTY: I'm--

CALVIN SCHNURE: Oh, sorry.

JEANETTE GARRETTY: I'm just glad you didn't bring up 1979. So we don't want to go that far back. You know, I think what they're saying is-- and I think you want to look at the language in the press release. I don't know what's going on over in the press conference. But in the press release, there is a little bit more emphasis in the press release to the fact what they're looking at in inflation.

And I think-- I think you have to compare press releases and see that change happening. So they are paying attention. But I think the way they view it is that there is not conclusive evidence as yet that we've got a firmly established higher inflation track. So there's not the evidences yet to counter their view that a lot of what is going on is, in fact, temporary.

ALEXIS CHRISTOFOROUS: You know, Calvin, we keep hearing the Feds talking about wanting to reach full employment before starting to taper those bond purchases. You know, we're having such a labor shortage in this country right now. What's your best educated guess as to when-- if and when we get to full employment? And if the Fed waits too long, what's the downfall there? What's the downside?

CALVIN SCHNURE: We have quite a while to go before labor-- before difficulty in hiring becomes a labor shortage. When you say a labor shortage, you're saying at what price, at what wage, at what wage rate. And right now, some employers are saying they can't find them at the wages they were offering pre-pandemic. People want a little bit more compensation to go back.

You compare the economy now versus what we had when we had higher inflation in the 1960s, early 1970s, the economy really ran hot. We had much lower unemployment for quite a while, and GDP was above potential. GDP has not been above potential since 1999, 2000. So we really do not have an economy that's running hot, which is what would give inflation pressures that the Fed worries about so they can see the labor market tightening quite a bit before they need to move.

KRISTIN MYERS: And Jeanette, I want to come--

JEANETTE GARRETTY: I wouldn't disagree with that-- I wouldn't disagree with that, but I would make the observation I think there's great uncertainty as to what long-run potential is right now for GDP. And I think that if there's some place that this is going to get missed, it may be in the assumptions about the labor market.

I think it's very much driven by the observation that we have 7.6 million people still unemployed. The question is, how many of those are really likely to come back? So there's great uncertainty about labor force and labor force participation rates, and that's where the tightness in that particular labor market might sneak up on them.

KRISTIN MYERS: We only have about a minute or so before we're going to be hearing from Fed Chair Powell. Jeanette, I want to come to you with this first. Just curious to know just because we had so much talk around this taper tantrum, some folks saying that we actually already perhaps saw it, at least in the first quarter of this year, curious to know what you see the effect of kind of yanking away some of this money, this pivot of what we're going to be seeing in real estate, in some of these other areas where folks are saying we do have a bubble right now, in part fueled by some of this money.

JEANETTE GARRETTY: Well, let's hope they don't yank it away. I think that's-- that's really important. I don't think the Fed wants to yank it away. And I think that they will do everything possible to do it in that fashion. So-- but nevertheless, I'm not sure-- I was, in the press release, a little bit surprised that there wasn't a little bit more discussion about QE and what would be done there.

If one looks deep into the press release, one sees that QE is somewhat positioned in this particular press release as having to do with the functioning, the smooth functioning of various areas of the market, and that that's why they're keeping it in place. I think when-- the first question is, when will they do this?

The question of how they will do this and where they will cut back and with what purpose is going to be very interesting. I don't believe the Fed has changed anything in their view in the respect that they are not there-- monetary policy is not there to-- to affect asset prices. That is a slippery slope. That's not what the Fed does well. So that will not be the motivation.

KRISTIN MYERS: All right, Jeanette Garretty from Robertson Stephens Wealth Management, Calvin Schnure, Nareit Senior Economist, thank you both for some of those final thoughts.