'Right now, inflation is not a problem… whereas employment is a very real problem,': Commonwealth Financial Network CIO

Commonwealth Financial Network CIO Brad McMillan joined Yahoo Finance Live to break down why Federal Reserve Chair Jerome Powell isn't worried about inflation.

Video Transcript

SEANA SMITH: We want to stick with this and talk about how investors are reacting to some of the comments that we got from Fed Chair Jay Powell today. And for that, we want to bring in Brad McMillan. He's the chief investment officer at Commonwealth Financial. And Brad, first, just get your thoughts just on what we heard from Jay Powell today. He doesn't seem to be worried about inflation. He's saying that the Fed's job is far from over. Was this largely in line with what you were expecting to hear?

BRAD MCMILLAN: This is exactly what I was expecting to hear. Because think about what the Fed Fed's mandates are. They've got inflation, and they've got unemployment. Right now, inflation is not a problem. It's not likely to be a problem, whereas employment is a very real problem. You were talking about the K-shaped recovery earlier. That's his focus. We're not going to see anything done on the Fed policy until we see significant progress on unemployment.

ADAM SHAPIRO: Brad, the bond market tries to put the Fed governors and the FOMC up against a wall. They don't succeed at that, though, when they're trying to pressure them, do they?

BRAD MCMILLAN: No, they don't. The Fed is very data focused. The Fed is very worried that they're going to tighten too fast. They don't want to see another taper tantrum. So they've got all the incentive they need to keep it as low as they need to, for as long as they need to.

And when you look at interest rates, I think it's important to get a little context here. Interest rates are moving back up to the lowest levels of where they've been for the past 10 years. And Powell's very conscious of that. So we certainly don't see any feeling that the interest rates are saying we're getting inflation. Powell's happy to let it float. He doesn't want it higher.

SEANA SMITH: Well, Brad, what does this mean, though, for big tech? Because we have seen the rise in bond yields has put some pressure on some of those big tech names. People are rotating out of some of those high flying growth stocks. Do you think that this could be the start of potentially a bigger pullback within that sector?

BRAD MCMILLAN: I think it very likely will be the start because when you look at how, not just tech stocks, but growth stocks in general have outperformed. And that's really coincided with rates coming down, and why is that? Because stock prices are the present value of future cash flows. The bigger the cash flows, the bigger the present value. So when rates start to go up instead, you're going to see a disproportionate drawback in the growth stocks.

I saw something-- I haven't verified this myself-- that we're now seeing the biggest shift from growth to value since the year 2000. I think that's very likely because of the interest rates and also because of the relative pricing. I think right now, we are saying value is probably some place to look at if you've been focused on growth.

ADAM SHAPIRO: I'm going to ask this question from the viewpoint of a Gen Xer, not a millennial, who might be forming a household. But if interest rates are going up, isn't there a chance that the Fed could be deflating, and perhaps in a good way, the prices people are paying for homes, and that other assets could get deflated as a process of that.?

BRAD MCMILLAN: Well, I don't think that-- I think other assets probably will get to be more consistent with interest rates. But remember, housing is largely demand driven, and we're seeing the millennials move into the housing market. The oldest millennials are now entering their peak earning and spending years, and that includes housing. So there's a real tailwind there. And in fact, in the short term, if you're thinking about buying a house and getting a mortgage, and rates are going up, are you more likely to move faster or slower? So I think that could actually help in the short term, and long term. I think we've got a lot of demand.

SEANA SMITH: Brad, how about the reopening trade names? And I'm specifically talking about travel. We heard from Royal Caribbean yesterday. They were out with their results, say, a pretty positive earnings commentary. Deutsche Bank yesterday upgrading the airlines. Are you seeing any reason to buy some of these names, or is it still a little bit too early within that cycle?

BRAD MCMILLAN: It's too early in my estimation. I think you have people jumping on an opportunity so as not to miss it. But as we're seeing with the recent volatility, it's OK to wait a bit until things actually start to look better. So personally, I would say we're getting through the pandemic. We're probably-- with clockwork, the beginning of the end. We're not at the end yet I'm not sure I want to be that aggressive on traveling. I'm not going on a cruise right now.

SEANA SMITH: All right, Brad McMillan, always great to get your perspective, chief investment officer of Commonwealth Financial.