One On One With David Jones, President of DMJ Advisors
Wednesday, June 14, 2006
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SUSIE GHARIB: Reports of slowing growth are not shaking President Bush`s faith in the economy. Today, the president brushed aside concerns in the financial markets that growth may be slowing and prices rising. A White House spokesman tells NIGHTLY BUSINESS REPORT core inflation has been moderate over the last year. The president also expressed his confidence that Federal Reserve Chairman Ben Bernanke will pay attention to any inflationary signs.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: There are a lot of indicators about the strength of our economy, starting with job creation, productivity increases, small... The entrepreneurial spirit is strong. There`s a lot of positive things, and, obviously, the Fed is watching the signals for inflation very carefully. They`ll make decisions independent of the White House.
GHARIB: So what can we can expect from Chairman Bernanke and the Fed? Joining us now with some analysis, noted Fed watcher David Jones, president of his economic consulting firm DMJ Advisors. Hi David.
DAVID JONES, PRESIDENT, DMJ ADVISORS: Nice to be with you, Susie.
GHARIB: As you analyze today`s beige book report and this week`s inflation reports, what is your take away on it? Does this mean that the Fed will certainly raise rates when it needs at the end of this month?
JONES: It certainly does. I think the Fed has seen the handwriting on the wall. We`ve seen underlying core inflation, excluding food and energy, move above the Fed`s comfort zone of 1 to 2 percent. In the latest month we`re at 2.4 percent. That is too much for Chairman Ben Bernanke and his fellow policy-makers. It`s virtually guaranteed they`ll go up another 1/4 to 5.25 at the end of June and I think you will probably see some wording in the statement in connection with that rate hike that there could still could be another one in August, depending on the economic data.
GHARIB: You know David, you probably heard that there is tremendous concern that the Fed will overdue it and raise rates too much, choking off the economy. And there are questions about Ben Bernanke is new to the job as Federal Reserve chairman. We`re in a delicate period. Do you think the Fed could overdo it?
JONES: It could. There is no question about that. Oftentimes when we`re in a period like this when the economy is slowing, and inflation has not yet turned down, the Fed has, in the past, overdone it in terms of tightening. But I`ll give the new chairman some credit, and particularly his vice chairman, Don Cohen, who is a steady hand at the Fed for many years. I think there is a possibility they could play it right, go up another notch or two on the funds rate, contain inflation at that point and maybe we`ll have a soft landing in the economy. It is possible the stock market was starting to bet on that today. That`s wishful thinking, but at least it is possible.
GHARIB: Where do you see rates by the end of 2006?
JONES: I think we`ll stabilize on the funds rate in that vicinity of 5.50 percent. I think the 10-year Treasury bond will be in that vicinity, essentially a flat yield curve at 5.5 percent. And I do see slower economic growth in the second, third and fourth quarters of this year, but no recession.
GHARIB: We hear the word stagflation a lot these days, that nasty combination of inflation with slowing growth. Could that happen?
JONES: I don`t think so, not this time around. We saw that in the `70s when we had low productivity growth which virtually guaranteed we would have slow growth and high inflation and very high unemployment. But with very strong productivity growth, 3.7 percent in the first quarter of this year, given that kind of trend, which helps hold down unit labor costs, I still think this economy is in good shape, and as growth slows, I think that will help bring down inflation, particularly given the likelihood that productivity will keep unit labor costs low.
GHARIB: David, you`ve been analyzing the Fed for so many years. You even worked there for a while. How do you rate the job that Ben Bernanke is doing so far?
JONES: He stumbled badly in that joint economic committee testimony on April 27th, when he hinted at a pause, despite the tilt toward risks of higher inflation but I think he learned his lesson. I would give the Fed chairman an "A" on that speech on June 5th to the American Bankers Association, saying fighting inflation and maintaining high anti-inflation credibility is a good thing. Let`s give the chairman right now a "B" plus for his performance so far.
GHARIB: What do you think the market thinks of his performance? Are they confused?
JONES: The markets are very confused. We`ve seen huge volatility in the stock market, in the commodities markets, in the precious metals markets. It will take a while to get adjusted to a new Fed chairman, but I think he is on the right track now on fighting inflation.
GHARIB: All right, David. Thanks for coming on the program, appreciate it. We`ve been speaking with David Jones of DMJ Advisors.
