Fed: Soft landing debate continues after Powell comments

After comments from Federal Reserve Chair Jerome Powell Friday morning, investors are once again squirming to figure out the central bank's next move on interest rates.

S&P Global Ratings Global Chief Economist Paul Gruenwald joins Yahoo Finance to try and make sense of the ongoing debate around whether or not the US economy will have a soft landing in 2024, and how the market will operate on the Fed's monetary policy.

"If the market starts to ease too early and we see bond yields fall, for example, that eases financial conditions too early and kind of increases the probability that the central bank has to do more, so I think the Fed would prefer not to do more at this point and let the markets do the work, but the job of the markets now is to kind of keep those financial conditions tight enough to slow the economy," Gruenwald elaborates.

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

AKIKO FUJITA: Investors are pushing back against the Federal Reserve's higher-for-longer rate message as we go into the last month of the year. And while they are watching out for Fed Chair Jay Powell's comments today and looking to the December meeting, debate over achieving a soft landing persists.

Our next guest thinks that the risks to our soft landing baseline look balanced. Let's bring in S&P Global ratings Global Chief Economist Paul Gruenwald joining us on this Friday. Paul, good to talk to you today. So if things look balanced, what does that ultimately mean? Is the Fed gonna stick the soft landing?

PAUL GRUENWALD: Yeah. Well, thanks for having me on the show. We think that's the most likely scenario right now. We've continued to underestimate the strength of the labor market in the US. And that's really the secret sauce.

As long as services spending remains robust and as long as the labor market, which is driven by that remains robust, we think that the Fed can slow the economy as a result of their rate hikes and, you know, get down to a more sustainable path. We're gonna have to grow below potential kind of one, one and a half-ish for a year or so to take out the excesses. But for us right now, that's the most likely scenario.

AKIKO FUJITA: There is a bit of messaging happening obviously from the Fed Chair today trying as he sees the market kind of run ahead, not just on the expectation that the rate hiking cycle is done but that there could be cuts going into next year. I mean, how do you see some of the messaging coming through today as the Fed tries to keep optionality available?

PAUL GRUENWALD: Right. That's a bit of a balance because, you know, the Fed controls the short-term policy rate. But they want the markets to do the actual work through the financial conditions. So when the Fed or any central bank starts to tighten, that has an effect on yields and spreads and asset prices and everything else.

If the market starts to ease too early and we see bond yields fall, for example, that eases financial conditions too early and kind of increases the probability that the central bank has to do more. So I think the Fed would prefer not to do more at this point and let the markets do the work. But the job of the markets now is to kinda keep those financial conditions tight enough to slow the economy. And if we're continuing to see drops in bond yields, that's kind of going in the wrong direction.