Powell signaling faster Fed tapering 'was a bit too aggressive' given Omicron news: Strategist

Invesco Chief Global Market Strategist Kristina Hooper joins Yahoo Finance Live to discuss how Fed Chair Jerome Powell communicated tapering strategies in light of the Omicron COVID-19 variant.

Video transcript

ZACK GUZMAN: And for more on what it means for the markets, very happy to welcome back into the show Kristina Hooper, Invesco Chief Global Market Strategist-- joins us here. And Kristina, thanks again for taking the time to chat. I mean, obviously, no shortage of topics to get into here, after hearing from Jay Powell yesterday and again today. But what do you make of, I guess, his kind of accelerated shift off tapering here, and then, also, the shift away from viewing inflation as maybe a backseat issue to being very much top of mind?

KRISTINA HOOPER: Thanks for having me. And I should start by saying, I would have expected Jay Powell to say this last week. But then, the environment changed dramatically, because we learned about the Omicron variant. And so I don't think it was necessarily the appropriate approach now. Now that we know there is a variant out there that is far more contagious. I mean, we're still-- there's still a lot of uncertainty around it, around how well vaccines protect against it.

So I think it was a bit too aggressive to be talking about this. Last week, yes, it would have been appropriate. But now, really, in many ways, the world has changed. Now, having said all that, it doesn't mean that Jay Powell will go through with moving up the rate hike timeline. I do think there's still a very good chance that tapering is accelerated. And I think that's OK.

I think markets can tolerate that. But I think if he starts talking more about moving up the timeline for rate hikes, that could be more problematic for markets.

JARED BLIKRE: Kristina, good to be with you here. I want to talk to you about the volatility seen in the bond market. Because the bond markets knee-jerk reaction to those comments from Powell yesterday were to kind of price in an accelerated time for those rate hikes. Doesn't mean that they're right, but-- I'm just wondering, because we've seen all this elevated volatility in the bond market, not so much in the stock market. Does that give you any concern for risk assets here?

KRISTINA HOOPER: Well, it doesn't give me that much concern for risk assets, because I always think that markets are voting machine in the short run and they're only a weighing machine in the longer term. So we can have those kind of knee-jerk reactions, and we shouldn't read too much into them. I also think the 10-year Treasury yield has often been a far more accurate gauge of fear than the VIX. But it doesn't necessarily mean that the fear is justified. It's just where we are today.

And again, it was quite a surprise. I think of Powell's comments yesterday is something akin to his Bernanke moment, going back to May 2013 and Ben Bernanke's statements. But again, I don't think we should worry too much about this environment. We have to take a step back and realize monetary policy is still incredibly accommodative. Even if the taper is accelerated dramatically, monetary policy is still incredibly accommodative. And by the way, the fundamentals of this economy are very good.

But we do have a big unknown, and that is this new variant. And so we should expect volatility. We should expect wild swings in the bond market and the stock market.

ZACK GUZMAN: It is a big unknown. But it almost seemed like Jay Powell wasn't that concerned about maybe seeing a repeat of what we saw in 2020. And I suppose there's a lot of medical reasons, and we've heard from the experts there to maybe think that. When you think about the market reaction here, though, too, when we're talking about inflation, it's interesting to see five-year inflation breakevens actually come down.

And you think about Jay Powell coming off his transitory stance-- interesting to see those kind of moves there, if you do think maybe he's saying inflation is not just transitory anymore, but the market seems to be thinking otherwise. I mean, how do you kind of invest around some of these shifting takes when you look at the sectors that led the way in 2020-- 2021, and what you're expecting, I guess, for next year?

KRISTINA HOOPER: Well, that's a really interesting point. And that could give us some insight into why Jay Powell made the statements he did. Keep in mind, there are a variety of forces over time that can exert downward pressure on prices, on inflation. They include innovation, demographics, globalization, and central bank credibility.

Central bank credibility comes from talking. And of course, markets believing. I think that what we might have seen Jay Powell do yesterday was a little exercise in using the Fed mouthpiece to try to manage inflation expectations. So a year from now, we might look back and say, this was genius, that markets actually listened to him, and that he didn't actually-- the Fed didn't have to raise rates prematurely. But that was enough to take down inflation expectations.

I do also think it's important to point, he may have retired the term transitory, but I don't think he's changed that much his view on how long inflation will last relative to what he said a month ago. I think it's just he's found transitory to be too confusing for the public.

JARED BLIKRE: And Kristina, I want to get your outlook for 2022, in terms of where we are in the business cycle. And albeit, we have a lot of unknowns here. But typically, when the Fed is about to raise rates-- even when it starts beginning-- even when it's in the process of raising rates-- that's because the economy is doing well and the stock market tends to rise.

But we get a different flavor. We get a different mix of sectors and investment styles. And I'm just wondering what you're looking to try and capture in 2022.

KRISTINA HOOPER: Well, I think what we're going to see in 2022 is a deceleration in growth. So we can think of it is that component of the economic cycle that is characterized as something akin to a slowdown. That doesn't mean that we're heading into recession anytime soon. This phase can last a very long time. Right now, we're seeing above-trend growth. That's likely to continue, and then start to decelerate in earlier-- probably in 2022. And that's OK.

In that environment, risk assets can still perform well. And as I said, this phase can last a long time.

ZACK GUZMAN: I mean, I guess in the short term here, when you kind of look at some of these risks, would you fall under the same camp that it sounds like Jay Powell is in, in regards to maybe this being a short-term blip in fears that we saw-- basically every time we have a variant that pops up. People don't know what that looks like. But I mean, when you look at the statistics and the data here in the market, it doesn't sound like you're seeing any serious indications of warning signs right now.

KRISTINA HOOPER: Well, we did hear a few concerning things from pharmaceutical company leaders yesterday-- that maybe existing vaccines might not protect against it. And I certainly think that contributed to some of the negative sentiment in markets yesterday. But nobody really knows any of the answers just yet, and it's going to take weeks and weeks for us to find this out. So as we hear data points, tidbits of information, it's likely to contribute to pretty big swings in markets.

And again, I think we just have to expect that. It sounds like this could be worse than Delta, but it might not be. So I think, as you accurately point out, this is an environment in which we wait and see and we try not to fall victim to our emotions, which can sometimes get the better of us, especially when we're talking about something like COVID-19.