Jim Grant on the market's response to the Fed's economic outlook

Benchmark interest rates are near zero and Fed Chairman Jerome Powell says they'll likely stay there for a while. Jim Grant, founder and editor of Grant's Interest Rate Observer, joins "Squawk Box" to discuss.

The Fed is on standby.

The central bank voted on Wednesday to keep short-term interest rates near zero, with Fed Chairman Jerome Powell saying at a subsequent news conference that officials are “not even thinking about thinking about raising rates.”

Fed officials also predicted that U.S. economic activity would contract by about 6.5% this year, but jump by about 5% in 2021.

Here’s what to watch after the Fed’s statements:

‘Unfriendly’ forecast

David Zervos, chief market strategist at Jefferies, said the Fed’s economic outlook was “pretty bleak”:

“At the end of 2022, we still have an unemployment rate, according to the Fed of 5.5[%], which is well above their [Non-Accelerating Inflation Rate of Unemployment] estimate. So, this is a pretty unfriendly economic forecast, but then you have a Fed chair that’s telling you, ‘Hey, I got you. I got your back. I’m going to do more if I need to. I’ll do whatever it takes.’ And so, I think the market’s got to tussle with those two things. I came away from the press conference, though, feeling pretty good even with the very downbeat forecast, which may or may not be correct. As Jay said, we should all feel pretty humble when thinking about making these forecasts and also humble about the ability of the Fed to create inflation, which is something that they’re very concerned about and were concerned about going into this. So, I think that the overwhelming story is not the economic outlook, it’s that the Fed is there with programs, with everything that it’s put in this to make sure that if we do have a second wave or another bout of weakness for any reason, we’re just going to get the stimulus coming back in. And the last thing he said … when the market kind of took a little move back up — not huge, but it definitely seemed to react to it on the last question — was when someone tried to ask him about, ‘Do you care about stocks all being up since the lows?’ … And he said, ‘We don’t really care. We’re not here to sort of call a bubble or not a bubble. We’re here to make sure there’s maximum employment and price stability.’ So, really not sort of putting a lid on stocks. … I thought that was a pretty strong comment for the stock market, like, ‘Don’t give us a whole bunch of flak for doing our job, which is trying to get jobs back and get inflation back to target, and we’re not really going to get worried about some nebulous concept of financial stability as it relates to where the equity markets are.’”

Eye on inflation

Michelle Meyer, chief U.S. economist at Bank of America Merrill Lynch, said investors need to pay attention to more than just the surface-level economic data:

“Fed Chair Powell made it very clear that there are a lot of challenges ahead for the economy and gave an outlook that was still quite concerning. Look, we can have an initial bounce, but then, certainly, there could be problems thereafter. The Fed is very convinced that there is going to be a disinflationary environment for some time. I mean, look at the [summary of economic projections] forecast, below 2% through the forecast horizon. The way that Chair Powell talked about the inflation backdrop with slack remaining in the labor market — and even when you get to full employment, it’s not obvious that that will be sufficient to generate higher wages and higher price pressures. So, yes, there’s a lot of stimulus that’s pumping in through the economy both on the fiscal front and on the monetary side, but there are a lot of things that need to happen in order for that stimulus to become inflationary. You need to have a Phillips curve that’s active. You need to have wages that are picking up. And I think that Powell communicated very clearly that they are not going to be convinced that there is an inflationary push, that there is a trend higher of inflation, until they see it. Just an unemployment rate that’s below target is not sufficient conditions to believe that there will be higher inflation.”

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