TIAA Bank President of World Markets Chris Gaffney joins Yahoo Finance Live to examine the Fed's management of the U.S. economy through the uncertainty of the pandemic and comment on the Omicron variant's effect on the travel and energy sectors.

Video Transcript

- We've got Chris Gaffney, TIAA Bank President of World Markets. Chris, I wonder if you can just walk us through the market action today. What do you see as the key driver in the sell-off?

CHRIS GAFFNEY: Yeah, it was a risk off-- obviously, it's the Omicron variant. Investors are worried that, not only will it slow-- the restrictions will slow some GDP growth, but, at the same time, you can see it actually increase inflation as it compounds the supply side dynamic. So it's really-- you know, investors are worried that Omicron will impact both inflation and growth.

- What's the base case that you're operating under when you talk about the potential inflationary pressures that could come from this? You know, it feels like we've gone from like zero to 100 on concerns around COVID over the last few weeks. And now we're starting to see those headlines again about potential closures coming. How are you operating in that environment and what do you anticipate come January?

CHRIS GAFFNEY: Well, you know, Powell at his press conference kind of brushed aside Omicron a little bit, saying that it wasn't going to have a long-- lasting impact-- it probably wouldn't have a lasting impact and-- but, at the same time, he is concerned about inflation.

So, you know, I think the Fed did a great job and Chairman Powell did a great job in pivoting and making sure that investors understand that they have their eyes on both of the dual mandates that, you know, they are concerned with inflation. And doubling the paper will give them the ability to address higher inflation a little sooner, with rate increases possible in 2022 and certainly saw a hawkish pivot there. So, you know, so far the chairman and FOMC have done a great job managing the US economy through this uncertainty. And, in my opinion, they'll continue to do that.

So, you know, the environment still is very good for companies. We've got strong consumer balance sheets, strong corporate balance sheets. And as long as they can keep inflation from spiking out of control, I think growth picks up next year as-- you know, Omicron is a risk, but, you know, hopefully the severity of that risk isn't as bad. And I think next year is going to be a good year for investors on the equity side.

- So you talk about improving earnings. You know, it's tough to see that today when the nega-- the headlines are so negative overall. But taking a step back here, what are some areas sectors that you think investors should be increasing their exposure to in anticipation of that outlook you just highlighted come next year?

CHRIS GAFFNEY: Well, interest rates are going to start rising. So, you know, financials typically do well in a steepening yield curve, right? So, you know, that may be a good sector to take a look at. You know, I think we will see the reopening. We will see consumers continue to spend even though retail sales were a little disappointing. You know, inflation's had some impacts there. But I think as we get through, you know, this Omicron wave and get to the other side of the latest surge-- you know, vaccination rates are really good and continue to trend higher. And I think some of the reopening plays will come back into play as we get through this surge again.

- Yeah, let's talk about some of those reopening plays. We were just highlighting the travel names that we've seen kind of go up and down really on these headlines but also energy. I mean, there was huge optimism here about the demand improving and here we are today talking about a significant pullback. Where are you positioned in those spaces?

CHRIS GAFFNEY: Yeah, and energy, I think-- you know, commodities in general will continue to see a bull market as we see manufacturers open back up and get back online. And demand is very strong and I think will continue to be strong. So I look for the energy sector to rebound. You know, we've seen some volatility, obviously, in the travel and leisure. Those are so dependent on, you know, what happens with this pandemic. And, you know, the restrictions that have been put on in Europe, there's some worry that we're going to see additional restrictions here in the US-- and if that occurs, you could see further selling of that travel and leisure.

But I think, again, the key is to get through the Omicron. Chairman Powell, you know, in his address, feels like the US economy is strong enough to get through it. We've seen it before. We've seen us get through the Delta. And if we continue to push forward on vaccinations, we will start seeing the reopening again and-- after the holiday season. Again, it's a very good environment for companies and company earnings going forward. So I'm fairly bullish after we get through this initial surge.

- Yeah, nice to get that note of optimism on a day like this. Chris Gaffney, TIAA Bank President of World Markets. Good to talk to you today, appreciate the time.