Expect the Fed to make future policy changes: BNP Paribas Asset Management

The Fed holds rates at near-zero, signaling higher rates in 2023, after the latest FOMC meeting. Tim Johnson, BNP Paribas Asset Management Head of Global Multi-Sector Fixed Income joins Yahoo Finance Live to break down the details.

Video Transcript

ZACK GUZMAN: I want to shift back over though, to what we're seeing play out here in the market, as the Dow is well still in red territory, shaping up for back-to-back losses in the session after we got the update and thinking at the Fed, their dot plot showing earlier than previously forecasted hikes, two possible by the end of 2023.

And for more on that as well as the other things we learned about shifting potentially earlier, specifically when it comes to tapering, want to bring on Tim Johnson, BNP Paraibas Asset Management head of global multi-sector fixed income. And Tim, just first, I guess, your reaction maybe to the way the markets are reacting to what we heard from Jay Powell yesterday at the conference, talking about this meeting finally being the one where you could say it's putting to rest the talking about talking about language.

TIM JOHNSON: Well, I'm not surprised, actually. I think the market was seeing this coming for a while. I think perhaps it was a little bit early. They were expecting another meeting. And really, the way I'm looking at this is, with the way inflation has been coming in of late, it makes perfect sense that some people that were giving their dot plots would expect some increases in rates earlier than before.

So I'm not surprised. And I think the market has been really complacent and comfortable with the backstop of the Fed for a long time. We're in a transition phase now. And there's going to be a little bit of turbulence.

AKIKO FUJITA: Tim, it's been interesting to see the moves in the 10-year yield over the last 24 hours. We saw a big jump initially on the back of the Fed statement, about 10 basis points. But since then, right now, it's trading at 1 and 1/2 percent, kind of that right back to where we were pre-FOMC meeting. What does that tell you about the expectation there? And do you expect it to remain around this level, even as the data points to inflation build up?

TIM JOHNSON: Right. We don't expect it to remain around this level. We expect it to resume rising not quite as fast as it did in the first quarter, but to around 2% by the end of the year. And what I think is happening now is the market is really digesting this transition, this change.

For the last decade or so, the Fed has been keeping rates low, suppressing volatility, not just the Fed but other world central banks. And what we're seeing is other central banks have already started to hike. And the Fed is just communicating to the market that we are now thinking about tapering. And eventually, we will hike.

There will be worries about what that means. There will be discussions about a policy mistake. I think it's extremely premature to kind of think about that right now. So I think the market is really just coming to grips with the fact that the Fed is not going to be extraordinarily accommodative forever.

ZACK GUZMAN: How does that maybe change what you expect to see in terms of leadership in the rest of the year? Because we've obviously seen financials as people were expecting rates to continue to rise at the pace we saw in Q1 maybe. Today, a big reversal there when you look at the big banks you know in the red today. I mean, how does that maybe shape up the change relative to what we saw in the first half of 2021 compared to the back half now?

TIM JOHNSON: Well, frankly, I think that we're going to see something similar to the first half of 2021. Again, we do expect inflation to keep rising. We do think it's transitory. But this question about whether it's transitory or not really, we won't really know for two or three quarters.

And what I also think will happen is that, as you had the senator on before talking about the infrastructure bills, fiscal stimulus will continue. I think that will continue to support growth.

And what's really important from our perspective is what that means for investors. Investors really have to be flexible. And in order to kind of have a resilient fixed income portfolio, it's important to not only focus on the US but also to kind of diversify geographically and across sectors. And I think that's going to be important for investors to think about through the end of the year.

For example, in the first quarter, high-yield indices were up 2% or 3%, while US treasuries were down 4%. So fixed income is a very diverse asset class. And I think it's important to have that active management to navigate, especially now, this transition that the Fed has started.

AKIKO FUJITA: On the infrastructure package, how stimulative do you expect that to be, even if we just take the GOP's compromise bill? We're talking about a trillion dollars in extra spending still.

TIM JOHNSON: I think the market would like to talk about it. The market will start to build that into some expectations. But as we know, infrastructure bills, the actual dollars hitting the road, shovel-ready projects, that really takes some time for that to materialize. But I do think the messaging around that infrastructure bill really helps to support the idea that we're not only undergoing extraordinary monetary policy stimulus but also fiscal stimulus. And they're working in concert.

And that's one reason why we're comfortable with our outlook that growth will continue to improve. It could be a little bumpy from quarter to quarter. But it will continue to improve. Inflation will remain higher, not get out of hand. And that the Fed will and should continue to remove accommodation at a measured pace.

ZACK GUZMAN: All right, Tim Johnson, BNP Paribas Asset Management head of a global multi-sector fixed income, appreciate you sharing your thoughts on that. Be well.