The Fed is ‘going to come under tremendous political pressure’ this year, economist says

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Vested Chief Economist Milton Ezrati joins Yahoo Finance Live to discuss consumer confidence, the Fed's decision-making, inflation, and real estate.

Video Transcript

EMILY MCCORMICK: Adam, as we continue to watch these volatile markets heading into tomorrow's fed decision, we want to bring in our next guest to discuss the latest flow of economic data, and what this might mean for monetary policy. And for that, we have Milton Ezrati, Vested chief economist. Milton, thank you so much for joining us. I want to start off with the rate that we got on consumer confidence this morning that we can slightly compared to what we saw in December, the Conference Board's headline index coming in at 113.8 for this month versus the 115.2 from December.

And that was mostly because of short term growth expectations weakening due to inflation and Omicron. How do you think these concerns are going to translate into the hard data and real consumption for this year?

MILTON EZRATI: Well, I think they are going to factor in. I mean, right now, we have tremendous momentum from the recovery. But that is beginning. There are other things that are suggesting that it's beginning to lose momentum. And so now we have to count on people's fundamental long term confidence. And the inflation is a big issue, not just the inflation, but what's going to be done about the inflation from most people's point of view. I think it's very interesting when you look at the data, it still looks pretty good. Not every data point looks good. But it still looks like the economy is recovering.

But all the surveys and the confidence numbers suggest that the American household is getting worried.

ADAM SHAPIRO: So Milton, we hear when people talk about data, especially from data analysis, that it's the question you ask when looking at the data. So when we're looking at consumer confidence and consumer sentiment, what is the question as an economist, we should be asking to get an appropriate answer that might guide us as to what we do with our investment?

MILTON EZRATI: Well I wish I could conduct the surveys. I can't. But if I were doing the survey, I would make a big distinction between asking people what's going on in your life now and what do you expect. Now some of the surveys do this. But it depends on how you ask the question. But I think that the part of the problem we have today is that a lot of these surveys were and still are conducted just in terms of how people feel immediately. And some of the other surveys that have nothing to do with the confidence surveys, you've got people saying the country is going in the wrong direction.

There's a lot of politics there. But it also suggests that they're worried about the economy longer term.

EMILY MCCORMICK: And Milton, I do want to switch gears and talk a little bit about housing. Because one of the things that you mentioned is that housing does present itself as an answer to inflation concerns. How do you suggest investors really consider this as a play for potentially their own portfolios and their own assets, and net value, and net worth when we have a Federal Reserve that is likely going to be raising interest rates multiple times this year and we get into this tightening cycle for equities?

MILTON EZRATI: Well that's a good question. And it is. Real estate is a classic hedge for inflation in two ways. One is that it tends to rise with inflation indeed. It tends to outpace inflation. At least, that's the historical record. The other thing is if you can lock in a low interest rate, which you could today if you bought today on your mortgage, then you would be paying an interest rate that is far lower than the rate of inflation for the life of the mortgage. And that's a double hedge in this case. It's hard to buy multiple houses as part of your portfolio. There are very few people who can build a portfolio that way.

But there are real estate investment trusts. You have to be careful what you're buying. There are real estate investment trusts. There are other ways to play real estate in the market for a mutual fund or a mutual fund type investor. So even if you are in your house and you don't want to sell, and buy, and trade up, and do all the things someone else might do to hedge the inflation more thoroughly, there are other ways you can go in the marketplace that should outperform the equity market and indeed outperform the inflation as well.

ADAM SHAPIRO: It was so much easier to buy lots of houses in 2005. You could lie about the loans, right? The liar loans. All seriousness though.

MILTON EZRATI: [INAUDIBLE]

ADAM SHAPIRO: The fed right now, they're having their meeting. They constantly tell us that a day to day fluctuation in the stock market they don't pay attention to. But when you get a trend in equities, they pay attention to that, or do they not?

MILTON EZRATI: Officially they don't. They say our job is the economy. We're not interested in markets. But if you observe them day to day, or year to year, the fed does pay attention to the market. The classic was when Ben Bernanke back in 2013 said he was going to start tapering the quantitative easing, the market went into a tailspin, they called it the taper tantrum, and he lost his nerve and did not conduct a taper. Yellen had to come in months later and begin that taper.

So I think the fed does look at the markets. And it reflects especially in this election year, they're going to come under tremendous political pressure not to cause stir in the economy or in markets. I'm not suggesting that Bernanke will fold, but the pressure is going to be higher than if it was last year or next year.

EMILY MCCORMICK: What do you think the number one question that the fed needs to address tomorrow is going to be?

MILTON EZRATI: Well, I don't think they're going to change their plans. They said March. And March will probably-- March is not that far away anymore. I think a lot of what the fed is going to do is the language. If they talk much tougher on the language and say, this is our number one priority, they are signaling the market and the economy that A, they take this inflation seriously after saying transitory for many months they take it seriously, and that they're going to act on this.

So it says to the marketplace if you were expecting three rate increases, you may get them. But if you don't, you're going to get more. And it's the language that matters.

EMILY MCCORMICK: Absolutely. Definitely a lot for investors to be watching tomorrow, especially after the past couple days of volatility. But Milton Ezrati, Vested chief economist, thank you so much.