Michael Arone of State Street Global Advisors joins Yahoo Finance Live to discuss President Biden's decisions to renominate Fed Chair Jerome Powell and nominate Lael Brainard as Vice Chair.
Video Transcript
BRIAN SOZZI: Here comes a duo of Jerome Powell and Lael Brainard atop the Federal Reserve. President Biden nominated both today to lead the Federal Reserve. Michael Arone is the chief investment strategist at State Street Global Advisors. Good to see you as always. Michael, Julie made the very astute point earlier in the show that this news may be good for tech stocks. I guess it's no coincidence that we're seeing Microsoft, Apple hit record highs off of this news. Is that your read?
MICHAEL ARONE: Well, I certainly think it means that the Fed will remain dovish for a while longer. So putting Brainard in that vice chair seat certainly leads to this idea that interest rates and monetary policy will remain lower for longer. And that's good news for long duration growth assets like technology.
Related Videos
So it's an interesting choice here in that Powell gives the stability to the markets and gets credit for managing out of the pandemic. And yet he appeases the progressive Democrats with Brainard in terms of her dovishness, as well as her focus on the regulatory framework, climate change, and addressing the wealth gap. Markets seem to like it so far.
JULIE HYMAN: They do, indeed. Michael, it's Julie here. At the same time, the drumbeat from the market has been rising that the Fed should be a little bit more aggressive, particularly going into next year with one or two interest rate hikes. So whether it was going to be Powell or Brainard or whomever, does the Fed Chair risk sort of becoming at odds with the markets in a way?
MICHAEL ARONE: They always do, and there's a growing chorus that the Fed is behind the curve. Particularly after the most recent inflation data, both CPI and PPI remain elevated. The Fed Chairman Powell specifically has started to walk back the transitory talk, right? He says it's no longer measured in time. So I'm not sure how it's measured.
So there is a growing chorus that the Fed is behind the curve on inflation and will have to either kind of increase the asset purchases or meaning accelerate the taper, and also bring those interest rates forward. And that could have a potential to unnerve markets. But with Brainard in kind of the secondary chair here and Powell already being a dove, I think it's still likely that Fed policy, monetary policy, will remain very accommodative for markets throughout 2022.
BRIAN SOZZI: Michael, is there a market risk we're not thinking of here? Things just seem a little too upbeat for me right now.
MICHAEL ARONE: Well, I think it all continues to boil down to how we exit the pandemic, and we continue to have some challenges with that. Now, that's the obvious one. We also know that there's always those kind of black swans. So the things that people are focused on are unlikely to derail the market. It's probably something that we're not thinking of. And that always is that elusive challenge. But, you know, for me, I think kind of exiting the pandemic continues to be the biggest challenge for the markets, at least cleanly. But they seem to be moving forward.
Now I think the good news here is that last week, the economic data continues to suggest that we're moving beyond the pandemic, supply chain challenges are likely to get better, not worse, and labor shortages are also likely to improve. And markets are celebrating that in the absence of earnings now that earnings season is over.
JULIE HYMAN: Michael, how are you thinking about the spending bill and the necessity of it for the US economy and for the markets to keep running?
MICHAEL ARONE: Julie, I'll kind of lay my cards on the table here. I'm a self-described libertarian, so I'm certainly not a big proponent of large kind of federal spending at a time of high deficits. So for me, kind of personally, I continue to think that this seems to be a bit profligate spending at a time when deficits are wide, and you're coming off some massive fiscal spending to address the pandemic, which was needed. But I think here, I think this is a bit of a stretch from that standpoint.
Now, I do think it will have some economic benefits. But it will come with higher debts and a wider deficit. And interestingly enough, the policy is intended to change trend growth rates, the economic growth rates. Yet the kind of evidence to suggest that it will is really ambiguous. So I'm not sure it's going to have the impact to the economy that most people expect, particularly given its impact on debt and deficits going forward.
JULIE HYMAN: I mean, at the same time, I guess, as in the role that you're in, sometimes you have to separate your own political hat from the markets hat, right? So because we have seen thus far and not just with this latest spending package, but historically, packages like this have been pretty good for markets right? And if this one is aimed in particular at sort of an equalizing effect economically, one would think that that could have some benefit as well.
MICHAEL ARONE: It certainly could have some benefit at the margins. Some of these, you know, fiscal spending packages, it is difficult. This is much different than sending stimulus checks directly to middle income and lower income families into their bank accounts. So the direct impact will be less. Now, that said, Julie, you're right in that some of these policies will help address the wealth gap. That's probably a positive societal kind of change at this point. It should continue to bolster consumer spending. And as we know, that makes up a big portion of the overall economic output of the US. So that should be helpful as well.
So there are some ancillary benefits here around the margin. But I do think that some of the structural challenges in terms of debt and deficits and demographics will make it difficult for this fiscal spending package to change the trajectory in terms of economic growth rates from a longer term perspective. It'll be like a shot in the arm. It won't be a long lasting effect, in my opinion.
BRIAN SOZZI: Michael, just going back to potential sector winners and losers here, do you [INAUDIBLE] the strength we're seeing right now in these bank stocks? Because if rates are going to stay low for longer, which these two appointments suggest, that's not necessarily a good backdrop for financials.
MICHAEL ARONE: Well, it's interesting. I do think that as I said earlier, I do think the economy is rebounding. And the economic data last week, industrial production, capacity utilization, retail sales, all came in above what are more modest expectations after kind of the summer slowdown and the growth scare. So I do think the economy is on the mend. If we can kind of cleanly exit the pandemic, I think that'll help, too. And so that could continue to favor interest rates that drift upward.
What's interesting is from 2003 to 2006 and, again, from 2016 to 2018, interest rates were trending up. Now, admittedly, they were still at absolute low levels, but they were trending up. And they did have some of this volatility. I'd expect more of the same, but generally speaking, throughout the next year, I think rates will drift up, inflation will remain a bit of a hangover, and the fact that banks have high margins, high growth rates, a lot of loan loss reserves they're not going to use, and they're cheaper than the overall market should help.
They may have a negative impact here in the coming days due to the kind of expectation that regulatory requirements may change a little bit under Brainard, but I think banks actually make an interesting opportunity here.
BRIAN SOZZI: Point well noted. Michael Arone, chief investment strategist at State Street Global Advisors, good to see you. Happy Thanksgiving.