One on One With David Jones, President of DMJ Advisors
Tuesday, September 19, 2006
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SUSIE GHARIB: Our guest tonight believes the Fed will hold rates steady when policy makers meet tomorrow. Joining us now, David Jones, a veteran Fed watcher and president of DMJ Advisors. It`s an economic consulting firm. Hi, David.
DAVID JONES, PRESIDENT, DMJ ADVISORS: Nice to be with you again, Susie.
GHARIB: Well, you`re in good company. There are a lot of people who believe that the Fed will make no changes in policy tomorrow, but what about the policy statement? What do you think that the Fed is going to emphasize this go-around?
JONES: I think that pause will indeed continue, but I think the Fed is actually a bit more hawkish than the markets. They`re going to be very sensitive looking ahead to that late October policy meeting about whether or not core inflation -- that`s core personal consumption inflation -- comes down to that 1 to 2 percent comfort zone. It`s now at about 2.4 percent. So, I think you have to build in at least a chance of one more rate hike, perhaps in October. For now, though, the Fed could not have things better, no change in policy.
GHARIB: How much debate do you think is going on inside the Fed? As you remember, the president of the Richland Federal Reserve at the last meeting in August dissented from his colleagues. Do you think there will be other inflation hawks that will be siding with him at tomorrow`s meeting?
JONES: There could be. It`s unlikely that we`ll have more than at most, one dissent again at this meeting. Jeffrey Lacker, the head of the Richmond Fed has said that he might continue to dissent, given his hawkish position that he thinks the Fed would have to raise rates to cool the economy enough to bring that consumer inflation down. But my view is that most policy makers will go along with Fed Chairman Bernanke who feels that the economy is cooling off and that will eventually bring inflation down.
GHARIB: At the meeting tomorrow, what do you think are the benchmarks that the Fed is going to be watching very closely? What economic reports are important for the Fed?
JONES: Two things, one is that core inflation rate, whether or not there were hints it might come down and of course the producer price number being weaker than expected today helps in that direction. The second thing is inflation expectations. The difference between now and the 1970s when we had higher energy prices leading to much higher inflation, is the Fed has kept inflation expectation, the inflation expectations that you and I have, they`ve kept them contained. That number has been coming down, so I think the Fed will be happy with that. We saw it higher earlier in the year, some of the measures of inflation expectations, but now they`re coming down. That will keep the Fed happy.
GHARIB: You mentioned a moment ago about the October meeting. So many of us are already looking ahead to the October meeting and then there`s one more meeting in December. Do you think that we will see just that one rate hike, perhaps in October, or again in December? What`s your forecast?
JONES: No, that`s it. And I wouldn`t even bet the ranch on that one, but I do think the Fed would be willing to do that if inflation is not behaving. What I think then will happen after we get up to that 5.5 percent fund`s target level is that we`ll see a long period of no change in policy. The bond market had been betting on an early Fed easing. I don`t think there`s any chance of that, although I would say perhaps in the second half of next year, rates could be coming down.
GHARIB: There has been some speculation that Fed Chairman Ben Bernanke will set an official inflation target for the Fed. I`m just wondering what your thoughts are on that. Advantages and disadvantages of having an official inflation target.
JONES: I think that could happen. That October meeting was originally scheduled for one day, October 24th. Now it`s going to be a two-day meeting, the 25th as well. They could well talk about that inflation target. One thing to remember, though, is Chairman Greenspan, Bernanke`s predecessor, was very much against that. He thought it hurt the Fed`s flexibility to have an inflation target. Greenspan was worried the Fed might not be able to sustain growth as well. That`s the other Fed target. I think -- and remember, Greenspan brought inflation down, had stable prices without the target, but I do think Bernanke wants to move in that direction. I think he wants to de-emphasize the chairman`s role and emphasize the Fed as an institution. The inflation target would be exactly the thing that would do that.
GHARIB: All right very interesting. Thank you so much, David, for coming on the program tonight.
JONES: Thank you.
GHARIB: We`ve been speaking with David Jones, president of DMJ Advisors.
