One on One With David Jones, President of DMJ Advisors
Monday, August 07, 2006SUSIE GHARIB: Our guest tonight believes the Fed will pause its rate raising campaign when policymakers meet tomorrow. Joining us now from Denver, David Jones, a veteran Fed watcher and president of DMJ Advisors, an economic consulting firm. Hi David.
DAVID JONES, PRESIDENT, DMJ ADVISORS: Nice to be with you Susie.
GHARIB: Not long ago, when we were talking, you thought the Fed was going to raise interest rates at this meeting. Why the change of heart?
JONES: Well, I think the Fed has looked at a lot of weak economic data starting with that major slowing in the second quarter to only 2 1/2 percent real GDP growth, down from 5.6 in the first quarter and ranging all the way through those weak employment numbers for July, along with even an uptick in the unemployment rate to 4.8 percent from 4.6. So across the board, the Fed is seeing weakening in growth and eventually that could help bring down inflation.
GHARIB: And yet you told me that there`s not much consensus inside the Fed, that it`s a crucial meeting. It`s really too close to call and that there`s this debate going on between the doves and the hawks. What is the debate all about?
JONES: Well, I think on one side is probably our new Chairman Ben Bernanke who feels it is time for a pause. He`s been looking closely at the actual slow-down in the economy that`s underway. He`s also looking at the pipeline of tightening we`ve seen in those 17 rate hikes before. That`s yet to be fully felt in the economy on the negative side. So therefore I think he favors a pause, but we also have some bank presidents within the Fed who feel that there`s too much inflation, that inflation is running above the Feds` comfort zone and the Fed has to be very careful to preserve its anti-inflation credibility. They might favor a rate hike.
GHARIB: So let`s say there is a rate hike tomorrow. Is that a bad thing for the economy?
JONES: Well, I think the consensus would be, certainly my view would be that if they do hike rates, it would be one and done. They would go to 5.5 percent on the overnight funds rate and that would be it. If that were the case, I don`t think it would do major damage to the economy, but I must say we`re getting into dangerous territory. The Fed is in restrictive territory now. It`s going it hurt housing. It`s going to slow the consumer so the Fed has to be careful how far it goes up in rates.
GHARIB: And what do you think is going to be said in the policy statement that accompanied the Fed decision. Everybody analyzes that more sometimes than what the Fed decides on interest rates, up or down.
JONES: That`s exactly right. I think after the Fed announces its pause, keeping rates unchanged at 5.25 percent, we`ll see a somewhat hawkish statement saying that the Fed intends to continue to be vigilant against inflation, that if slowing growth and the tightening already in the pipeline doesn`t do the job of bringing inflation down, the Fed may have to tighten again. So I think it`ll be a pause, but with clear indications the Fed could go again if has to to bring inflation down.
GHARIB: All right, so with that kind of cautious statement, if that is what happens, what do you think the market reaction will be? Is the market already expecting for that kind of, I don`t know how you describe it, like sort of half-hearted decision?
JONES: Well, there`s an old saying in the market, Susie. Buy on the rumor and sell on the news. I think this would be a perfect case. There has been a rumor of a Fed pause. We saw it all the way back to the Fed chairman`s earlier semiannual testimony. I think as of tomorrow, if the Fed does pause, they`ll get very little positive market impact. I think the market will be worrying about other things like oil prices.
GHARIB: All right. We`ll see what happens tomorrow. David, thank you very much.
JONES: Thank you.
GHARIB: We`ve been speaking with David Jones, president of DMJ Advisors.
