The Fed is trying to make sure that we avoid a taper tantrum: Prof. of Economics

Randall S. Kroszner, The University of Chicago Booth School of Business, Norman R. Bobins Professor of Economics joins the Yahoo Finance Live panel with the latest on the Fed.

Video Transcript

AKIKO FUJITA: Judging by the market reaction, it certainly felt like investors were a little caught by surprise here in what they saw as the hawkish bend of the FOMC. What stood out to you?

RANDALL S. KROSZNER: So I think Jay is at pains to not be disrespectful to his colleagues but also to try to say, don't put too much emphasis on the dots because what it should be is have one really big bot for Jay and a lot of small dots for most everyone else. And I kind of think of some of those smaller dots as sort of like renegade dots that are out there, that they're just running up in 2023.

I don't think Jay has changed his view. I don't think he thinks that, at least in his mind, that they're going to be raising rates any time sooner. This was a step towards transparency that came up many years ago that I think was helpful in defining what, for an extended period of time, low rates would be. Now I think it actually causes a bit more confusion.

Listen to him, and I think he's saying nothing has really changed. You shouldn't think that very much has changed. But we are going to start a process of at least talking about what the next steps are, which is totally reasonable.

BRIAN CHEUNG: Hey, Randall, it's Brian Cheung here. Great to speak with you. On one hand, yes, it was definitely a surprise on what the Fed delivered yesterday. But it's actually also surprising how bond markets and the equities markets didn't blink more. We did see the 10-year rise as high as 10 basis points. But then it came back down as he was talking down the dot plots in the press conference yesterday.

So was this really a Goldilocks situation for the Fed, that they didn't actually do anything in terms of changing their policy setting, at least immediately yesterday, but they still signaled what could be the next step without causing any sort of stir in the markets?

RANDALL S. KROSZNER: I think that's exactly right. And that's what they're trying to do is making sure that we avoid a taper tantrum, that some sort of sudden change or an interpretation of sudden change from the markets. And so do a little bit today. And so there'll be a little bit of volatility in the market that comes in.

But exactly as you said, if you look at the bond market, which is estimating what the interest rates and inflation is going to be over the next 10 years, hardly a move. And what's also interesting to note is that, even though we've had another very high print of inflation, the 10-year rate has actually come down over the last few weeks rather than going up. And so that suggests that the Fed is credible, that the Fed is being believed when they say that this is transitory, and that they will act when they need to to raise rates or stop the asset purchases or slow the asset purchases.

But all that's going to go in a relatively smooth way. It's pretty impressive.

BRIAN CHEUNG: At the same time, the blackout period is about to open up. We're about to have 18 people go out into the world and voice their ideas here. And they could be all over the place, given the distribution of not just the dot plots but the broad projections on inflation and unemployment. So do you think there's going to be a real major communications challenge for Jay going forward because of just the distribution and the uncertainty that's going forward that might be pinned to an actual tightening of policy, which of course, may in markets in a tizzy?

RANDALL S. KROSZNER: Sure. Well, hopefully people can look for the signal through the noise and realize that the renegade dots aren't nearly as important as Jay. And I think Jay was fairly clear. And I'm sure he will be speaking in the not too distant future.

And so I think it's really focusing on him. Certainly, there'll be volatility. And there, of course, is going to be volatility in a time like this. People have different points of view. And they should have different points of view.

It would be terrible if everyone around that table completely agreed because that means that you're going to miss something. If you have people with different views debating those views, at least you're battle testing your ideas. You may not be right. But at least you are aware that there's some sort of alternative.

So hopefully the markets will see that that's more what's going on, rather than so-and-so said this, now so-and-so said that. And next thing you know, interest rates are going to be 4% next month. No, that ain't going to happen.

ZACK GUZMAN: And Professor too, I mean, we were talking about how the market's been taking all of this in stride. You have some smart people-- I'm thinking Jason Furman and Jim Paulson-- kind of talking about how this historically looks when you think about the growth forecasts. The Fed also coming out. You think about what that was before, 6.5% in March for forecasting for 2021, now 7%. A year ago, it was 4%.

So if you have that kind of growth moving in the right direction, I mean, how does that, maybe historically, play into maybe why the market is playing along with their idea of inflation not being a major concern or the idea that it might also help the market continue its March forward here, given the growth forecast moving in the right direction?

RANDALL S. KROSZNER: Yeah, I mean, these kind of numbers for growth are unprecedented for developed countries like the US, like the UK, where I am now, like much of Western Europe. We've seen China have numbers that are on this level but not other countries. And that's because we had this extreme lockdown that closed the economies down through explicit policy.

Often, economies get into trouble because of unintended consequences of policy. Here, it was very explicit that they wanted to slow interactions down and to slow the economy down. And now we're unlocking.

And you have so much fiscal stimulus, monetary stimulus, and a year's worth of pent-up demand. Savings rates are very high in the US. You're going to see very, very high growth rates. And then the issue is, is this a short run sort of thing that will then sort of move back to fairly normal growth path again? Or is this something that could lead to an unanchoring of expectations, people becoming worried, and then inflation expectations and inflation moving up?