The Fed choreographed very well to prepare the markets for tapering: J.P. Morgan’s Chair of Global Research

Joyce Chang, J.P. Morgan’s Chair of Global Research, joins Yahoo Finance to discuss the outlook on the Fed taper, inflation, labor market, and the housing sector.

Video transcript

ALEXIS CHRISTOFOROUS: I want to stick with the Fed now and the markets and welcome in Joyce Chang, Chair of Global Research at JPMorgan. So, Joyce, what are your expectations? You know, some are saying we might get more of a hawkish tone coming from the Federal Reserve today, but with everything going on with China and Evergrande, you have to wonder if that's really going to happen.

JOYCE CHANG: Well, great to be with you, Alexis. I think you could get more of a hawkish tone. But I think the FOMC is setting the stage to announce tapering in November. I don't think that they're going to make that type of announcement today. They've always said that they're going to give warning before they do something.

But I think where we're looking at is what's going to happen with the median dotplot for 2022. And I think that's going to show one hike next year compared to no hikes in the last dotplot this past June. So with the September meeting showing this forecast horizon forward a year, if you actually look at this cumulatively, the median dots could show six rate hikes cumulatively by the end of 2024.

Now, we don't think that the Fed starts hiking until 2023. We have two Fed hikes in our forecast for 2023. But I would actually take a look at more of the dotplot than necessarily thinking that this is the moment where tapering is going to be announced. But I do think that's going to begin before the end of the year on the formal announcement.

ALEXIS CHRISTOFOROUS: And do you think that now is the time to start tapering? I mean, we had one of the top Republicans, Senator Pat Toomey of Pennsylvania, out yesterday saying, you know, what he thinks the Fed is going to be behind the curve and will have to act very aggressively when inflation continues to heat up. He actually thinks the Fed is behind the curve and should have started taking its foot off the pedal here months ago. What's your take on that?

JOYCE CHANG: No, I don't think that the Fed is behind the curve on this one. And we are still seeing a lot of different crosscurrents globally, whether it is the China story where we have really zero growth for this quarter, or even on the US story. I mean, back in July, we were forecasting third quarter could be 9.5% growth.

We've taken that down 4 full percentage points to 5%. So you've got a number of crosscurrents still playing out because of the Delta variant, because of the slowdown in China. So I don't think that the Fed is behind the curve. But I think they have actually choreographed very well to prepare the markets for tapering by the end of the year. And I think that those expectations are likely to be what we hear in the next coming hour when the official announcements come out.

ALEXIS CHRISTOFOROUS: So you don't think there's any taper tantrum in our future-- that this will have been well telegraphed and the markets will have had enough time to absorb it.

JOYCE CHANG: I mean, the Fed has been tiptoeing towards tapering, so I don't see a Fed taper tantrum here. I think the communication has been very clear. And I think that, you know, November, December is what the market expects. And that very much has been JPMorgan's view for some time.

ALEXIS CHRISTOFOROUS: What about inflation? You know, we were talking about it all the time-- and not so much the past week or so as we head into this Fed meeting. Do you expect the Fed to continue characterizing inflation as transient?

JOYCE CHANG: I think they will characterize it as transient, because it has a lot of the supply side constraints that hopefully will be addressed over time. Now, there may be some delays to this because of the Delta variant, but I think that the transitory nature of this is something that we've seen. You know, just think about just the attention that had been on lumber prices, and then that came down 50%.

So I think on the input prices, the supply side constraints have been greater than what we had anticipated. But I don't see that changing the overall narrative that this is transitory. But we are in for a period where entire inflation is going to be here to stay-- higher than what we have had historically. But I don't think that's necessarily problematic, and I do think there are some transitory elements that are still playing out because of the supply side constraints-- some of those which will take maybe longer to come off but I think still will be coming off over time.

ALEXIS CHRISTOFOROUS: You know, I'm curious to hear what Jay Powell is going to say, if anything, about the ongoing labor shortages that we're experiencing, which is also adding to challenges for businesses. As you look ahead to the next earnings season-- I might be a little premature here-- but what might those supply chain constraints, and rising inflation, and labor shortages do to companies' bottom lines?

JOYCE CHANG: Well, I think there is going to be more of a focus on wage inflation. That seems to be more of a US rather than a global phenomena. But one thing we did is we just published a report looking at housing prices, and affordability, and why wages will need to go up. So I think you're going to see that dialogue on the labor markets evolve over time.

It's not going to be just the unemployment rate. It's also going to be the labor force participation rate. And it's also going to be looking at wage growth and whether that has been able to keep pace. So those are all issues that we're looking at, but we're still looking at unemployment numbers to come down from here, going back to more of the 4% handle by next year. So I think that with this, you then have some of this evolution of the arguments then looking at wage growth and also where we have labor shortages in certain sectors and still have a labor force participation rate that might be lower than really what the Fed has been hoping for.

ALEXIS CHRISTOFOROUS: I want to switch gears here and highlight a report we got today in the real estate sector, and that is existing home sales dropping 2% from the prior month, buyers pulling back. We saw supply tighten. Prices still very high, squeezing out a lot of first-time homebuyers. I'm thinking if you look at your expected timeline for an interest rate hike from the Fed, what might that do to the housing market? Because one of the big bright spots for people out there trying to buy a home right now are these uber low mortgage rates.

JOYCE CHANG: So we have seen housing prices go up around the globe. I mean, actually, we're seeing the fastest pace of housing price rises globally in about 40 years. And that really is weighing on affordability. And this comes back to the whole discussion on wage growth and whether that has been keeping up.

So I think that you are now looking, though, as we look forward, we don't see a correction on housing prices. That's in large part because of the supply demand story. We still see demand being very high, and a lot of this is due to the demographics-- so it's structural in nature when we look at millennial demand.

So I don't think that you're going to see housing prices really come down that much from here. But what we are seeing is the affordability part is really kicking in. And that's one reason why we may have really hit the bottom as far as just the lack of inventory that you're seeing affordability is actually now coming up as more of a policy issue.

Now, when we talk about lower rates, that has increased the availability of mortgages. But still on the affordability index, we're looking at levels now that are back to where we were before the Global Financial Crisis.

ALEXIS CHRISTOFOROUS: Right-- so still pretty low historically speaking. Joyce Chang, Chair of Global Research at JPMorgan, always good to see you. Thanks a lot.