Any volatility from bond tapering will be 'short lived’, economist says

Seth Carpenter, Morgan Stanley Global Chief Economist, joins Yahoo Finance Live to discuss how the global economy is faring amid the pandemic and break down what the Fed's tapering plans could look like in 2021.

Video transcript

- But first, we're sticking with the topic of the markets and the economic backdrop. And for this, we're bringing into the stream now Seth Carpenter, global chief economist for Morgan Stanley. And Seth, it's great to have you on.

First, I want to ask about a recent note that you had on global trade. And you mentioned that we're really on the upswing as we continue to move through this recovery. Trade values and volumes are back beyond pre-pandemic levels.

But we are still hearing companies talking about supply chain constraints and shortages. So what's your take on this dynamic that's playing out right now?

SETH CARPENTER: Emily, that's great. I think you hit on exactly sort of why our baseline view is constructive about the medium term but simultaneously hitting on where the clear downside risk to all of these things is. For the past year and a half, the downside risk, obviously, has been COVID. And I think that continues to be the case.

I think key points to be optimistic-- global trade has recovered to pre-pandemic levels and beyond. We have a hand-off from consumer goods trade towards capital goods trades. And that capital goods pickup and the CapEx cycle portends sort of a healthy medium-term outlook for growth. Where we see a shortfall still in global trade is in services, especially tourism.

So what does that mean? That means if COVID stays contained and if travel restrictions get lifted, there's that much more room to grow in terms of global trade through services and especially tourism. But those are two really, really big ifs. And if COVID is not contained and if we continue to see these sporadic sort of flare ups, then we won't get that boost from increased services trade.

And worse off, I think we could see more disruptions to the global supply chain, especially in those countries where we see these really aggressive containment policies, where they want to go for the so-called COVID zero. So baseline outlook it's constructive. The risks, they'll remain clear to the downside.

- Seth, I let out a huh when that retail sales report crossed the wires this morning. How fast is the US economy growing right now?

SETH CARPENTER: You know, I think we're tracking somewhere around 5% annualized growth for Q3, maybe a little bit above that. It was a really strong report. We were even a little bit below consensus because our auto analyst who covers equity space was looking for a pretty big slump in autos. And it did come down, to be sure.

But it wasn't as big as what we were looking for. Clearly, consumers have income. I think even with the cessation of unemployment insurance benefits, we're getting more jobs created, last month's print notwithstanding, to where overall incomes are growing, consumer spending relative to income in a long-run sort of relationship is still depressed. So I think there's lots of ways that consumer spending can still grow. And today's retail sales report, I think, put an exclamation mark behind that statement.

- And Seth, is one read off of the retail sales report-- maybe I'm reading too much into it-- but is that we are starting to move beyond, really, the worse impact of the Delta variant. And we might be headed into an economic re-acceleration into year end.

SETH CARPENTER: Yeah. I guess it's a little bit too soon to make that conclusion. Remember that for August we did see a resurgence in Delta variant. And when we get the rest of the data on the rest of services spending, we'll be able to see if there was a pullback maybe in some of those in-person services spending shifting towards more spending in goods, which is overrepresented in the retail sales report.

So I think it's still a little bit too soon to tell. Our view is the fourth quarter should stay strong. But then as we get into next year, we'll see things start to moderate. But like we were saying, this strong report really does highlight-- there's two away risk going on. There's clearly the possibility for the economy to outperform.

- Given the economic data that we've gotten recently between retail sales this morning, the mixed jobs data we've had recently, and inflation with that cooler than expected CPI data out earlier this week, what is your assessment right now of where things stand in terms of the Fed policy and timing for tapering?

SETH CARPENTER: Yeah. So our call still is that the taper announcement happens in December. There's clearly lots of probability on it happening in November. I think the soft jobs report should put paid to most speculation about September. And then I think it comes down to, how strong is that jobs report that we're going to get before the November meeting?

My view is the Fed policymakers, especially the core, Chair Powell and the rest of the center, given the soft jobs report we did get, getting one or two more extra jobs reports is going to give them that much more comfort that they're in the right position. And that's the reason why we favor the December meeting as the timing for the taper announcement.

But I think one key thing to keep in mind is that the fed policymakers really have in their minds tapering QE is not outright tightening. It is adding accommodation at a slower pace. And so as a result, I don't think they need to see the economy going at full bore for them to taper purchases.

They want to make their quote, "substantial progress." And for jobs, even though we only got 200 and something thousand last month, if we have that pick back up to where we're in the 500, 600, 700 range for one or several months, I think that's going to be enough continued progress for them to be ready to start tapering.

- Seth, you have a lot of experience in government-- the former acting assistant secretary for financial markets. You know, if you could put that hat on for a second, how important is it to markets that Fed Chairman Jerome Powell is kept in this job? Is the one that has taken-- that has just taken this-- this liquidity to a new level in the markets. How is important is it that he is the one that carefully helps unwind it?

SETH CARPENTER: I think from a market's perspective, a lot of market participants see Chair Powell as a known quantity. They see him as very accommodative, very dovish. They're used to him. And so in that sense, continuity will provide a lot of comfort, whereas in contrast, if there were a change, then I think there's at least a short run chance that there'd be a little bit of volatility.

I suspect any volatility, if there were a change though, would be very short lived because from my perspective, realistically, any replacement from the Biden administration for Chair Powell would be very, very, very close in terms of monetary policy specifically to Chair Powell. And so as a result, after the headline passes, after that initial reaction passes, I think people would start to dig a little deeper and ask, what would this person do in terms of policy? And I find it hard to imagine that there would be a nominee who would be in any way meaningfully different from Powell.

- All right. Something we'll be watching closely. But thank you so much, Seth Carpenter, Morgan Stanley, global chief economist.