‘The lift from stimulus is really supportive going into 2022:’ analyst

Group Managing Director and Senior Portfolio Manager of TCW Group Diane Jaffee joins Yahoo Finance to discuss how wages will be a major data point to watch in the next jobs report, predictions for November’s FOMC meeting, and the consequences if Congress fails to avoid a government shutdown.

Video transcript

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BRIAN CHEUNG: Welcome back to "Yahoo Finance Live." You know, every Fed meeting is always billed as the most important Fed meeting, but maybe this time is going to be for real. The next one in early November could be the announcement of the Fed starting to tighten the spigot on its pandemic-era gush of monetary stimulus. So for more on this, let's bring in TCW Group's managing director and senior portfolio manager Diane Jaffee for more.

And, Diane, a lot of focus has been on the bond yield movements this week, and this is coming especially as a flurry of Fed-speak comes out with regards to what they might do on tapering their asset purchases, the latest coming from the Philly Fed president this morning. He said he wants to slowly, methodically, boringly taper asset purchases. What is your expectation as we head into that November meeting? And how do you think data that we're going to get until that point in time maybe change the way the Fed is approaching that possible plan?

DIANE JAFFEE: All excellent points, Brian. The Fed loves data, and the unemployment number in August gave everyone a little bit of a soft pause. But then ensuing data, as you mentioned, seemed a little bit better. So that's why Jay Powell made those announcements that indicated that November was going to be liftoff time.

We do expect though that they will be paying strong attention though to the September employment data to make sure that August was just one aberration, of course, led by the Delta variant. And then if things go as everyone foresees, then we'll start the taper process. And I agree that the people at the Fed want to make it slow and boring. They don't want to make it very exciting.

BRIAN SOZZI: Diane, just based on what we have heard from Fed officials, what's going on with the debt ceiling, more earnings warnings from companies? I mean, do you think right now we're on the cliff, and we're ready to go over the cliff? And by that, I mean we see a deeper market correction going into October.

DIANE JAFFEE: So there's a reason why September is one of the worst months of the market. And one of those reasons is because that's when the end of the fiscal year for the US government is. And there's always a lot of power plays, and brokering, and brinksmanship. And that's 100% true since everything is really focused on some of these bills right here this week.

So it's not abnormal to have market corrections, three or four market correc-- short spurts downwards of 3% to 5% in any calendar year. We've done several months without anything really hectic. And that's because we have this tremendous monetary and fiscal stimulus behind holding us up, being a booster. So while I think there are some nail-- there's some nail biting going around, me included, that this lift from the stimulus is really supportive going into 2022. So, yes, there will be some waves along the way, but the trajectory, we think, is quite positive for stocks.

BRIAN SOZZI: Diane, is this one of those waves? Are we in one of those correction periods now?

DIANE JAFFEE: The market is testing the resolve of lawmakers to do the right thing. So a correction is typically 5% to 10%. We're not there yet, but we're bouncing along here. I believe that we are going to come out on the other side of even just this week in a better way, but it requires a lot of oar strength to get this boat through.

JULIE HYMAN: Diane, it's Julie here. The market seems to be betting that lawmakers are going to get done in terms of the debt ceiling, in terms of not shutting down the government, or at least not for an extended period. What about in terms of getting the infrastructure package done, the other spending package done, and in a size that the mark-- I mean, the market, for a long time, seemed to just take it for granted that that was going to happen. It was going to get through. What if it doesn't? How dire is that going to be?

DIANE JAFFEE: Well, don't forget that this kind of stimulus takes years to unwind and play itself into the economy. So it wouldn't be like the reconciliation package would immediately send huge jolts into the economic activity. But it would really preordain the next three to five years of good, supportive economic growth.

So we have a lot of stimulus already in the system. And I'm a big believer in the infrastructure plan. We have to build our roads and bridges. Internet, come on, let's get it across all the United States so people can go to school if they need to from home or work from home if they need to. So but I don't think it would be something that would immediately jolt the economy in a big, positive way. We already have that. We already have that stimulus for today, and tomorrow, and into next year.

BRIAN CHEUNG: And, Diane, I want to ask about wages, which could be a big data point in that next jobs report we're going to get next Friday. How important is that to the story of inflation. Because it's interesting to see, just in addition to the nuances between CPI or PCE inflation, what level of inflation you're looking at and whether or not you're looking at that in the labor market-- because there's kind of some debate about whether or not that translates into overall price inflation-- is certainly a question that is outstanding, not just for people watching markets but also at the Federal Reserve itself.

DIANE JAFFEE: Wages are the least transitory of the inflation statistics that the Fed is watching because they-- employees don't want to give up wages, of course. And employers don't want to make cuts when they don't have to. So we're now at about a 4% rate that looks pretty sticky to me. Other things could be more transitory, like lumber, like oil prices to some degree.

But wages have a positive side as well. If employees are getting more money, they're coming back to work, that adds to their spending power. And there's usually a sweet spot with margins for companies where employees are getting higher wages, and they are feeling confident about the economy, and they're willing to spend. And when that sweet-- that sweet spot could last from 9 to 15 months, at least it has historically. And that's when margins can actually increase at US corporations as wages are rising. So we want to be watchful for that. We want to be careful about that. But wages are the sticky wicket.

BRIAN CHEUNG: All right, Diane Jaffee at TCW Group Thanks again for hopping on "Yahoo Finance" this morning.