One on One With Robert Brusca, Chief Economist of Fact and Opinion Economics
Wednesday, July 19, 2006
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SUSIE GHARIB: Joining us now for more analysis of Ben Bernanke`s testimony and Wall Street`s sizzling rally is Robert Brusca, chief economist of Fact and Opinion Economics. Hi Bob.
ROBERT BRUSCA, CHIEF ECONOMIST, FACT AND OPINION ECONOMICS: Hi, Susie.
GHARIB: So what did Ben Bernanke say today that was truly new information?
BRUSCA: Well, it wasn`t much really that was new. What was interesting was that specific forecast that he provided from the FOMC looking for what`s going to happen for the rest of the year. And those forecasts imply quite a sharp slowdown in growth, so I`m kind of curious if the stock market rallied so strongly on what the Fed regards as prospects for much weaker growth, growth in the neighborhood of 2.5 percent or so in the second half of the year.
GHARIB: My take on what Wall Street was doing is that they were just interpreting that the Federal Reserve is going to likely pause maybe at its August meeting on raising interest rates. Are you saying that they`re misinterpreting what he`s saying or they`re not getting it right?
BRUSCA: Well, I don`t think it`s that so much as the conditions that the Fed needs in order for it to stay on pause are those (ph) a very, very weak growth. And so I think right now, it`s still up in the air about whether the Fed pauses in August or not. I`m still looking for a rate hike. But I think Bernanke made it pretty clear that in order for the Fed to go on pause, the economy has to slow down and that`s the quid pro quo and I don`t think the markets seem to get that. The market wants the Fed to stop tightening so badly, it just listened to this rhetoric from Bernanke that seemed to be softer and they ran with it, but I don`t think that was quite the message today.
GHARIB: Do you agree with Ben Bernanke`s forecast for economic growth? He`s saying something like 3.5 percent this year, excuse me, 3.5 percent this year and 3 percent next year and inflation around 2 to 2.5 percent.Do those numbers work with your forecast?
BRUSCA: Well, the 3.5 percent for this year I don`t think works for many forecasts on Wall Street. Most economists are looking for more growth than that, because his numbers implies that about 2.5 percent, 2.75 percent in the second half of the year. And I believe most of the economic forecasts are above that. So I don`t think the economy is going to slow enough and if it doesn`t slow enough, then it`s really not going to dispatch this inflation rate. In fact, I think inflation is more entrenched than he`s assuming in his analysis of the economy. We`ve got (INAUDIBLE) wages in the services sector and really quite a nice head of steam for core inflation right now.
GHARIB: Bernanke was asked about whether there was a possibility of a recession in the cards and he wasn`t terribly worried about that and then there have been some economists who have been concerned about stagflation. Do you think that either one of these scenarios could play out, recession or stagflation for the economy?
BRUSCA: Recession doesn`t seem very likely the what the Fed`s going because Bernanke`s been trying to stop hiking since he got into office. But of course what that suggests is that maybe it`s the stagflation scenario that could catch up on us where the economy doesn`t get weak enough to stop inflation and we get a weaker economy, but higher inflation and we are stuck in that situation. So I think the stagflation forecast is -- that`s a possible scenario unfortunately.
GHARIB: Ben Bernanke didn`t talk much about oil prices, the high oil prices that have been triggered, especially in view of the tensions in the Middle East. What is your view of the impact of $80, maybe $100 oil on the economy and on interest rate policy?
BRUSCA: I think we`re going to see firmer oil prices. The reality is that demand for oil is growing. The world is developing. People are becoming more energy intensive as they move from an undeveloped economy to a more developed economy. And that`s going to put more inflation pressure on the system. Not as much as we`ve seen in the past, but we`re going to see those oil prices creep up and the course with the Middle East the way it is, you could see them spike as well. So you`ve got lots of risks coming out of the oil sector and I don`t think you could hold your breath for lower prices.
GHARIB: There`s about 30 seconds left that we have to talk. Real quickly, bottom line, what did Ben Bernanke say that you liked and what worries you?
BRUSCA: I like the fact that he says he`s going to be hard oninflation but I don`t like his approach to it, because he seems to be talking one game and playing another.
GHARIB: All right, Bob. Thank you so much for coming on the program. Appreciate it. We`ve been speaking with Robert Brusca, Chief Economist of Fact and Opinion Economics.
