One on One With Dr. Laurence Meyer, Vice Chairman of Macroeconomic Advisors
Tuesday, October 24, 2006
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SUSIE GHARIB: Our guest tonight believes the Federal Reserve will make no change in interest rate policy tomorrow or for the next several meetings. Joining us now, Dr. Laurence Meyer, a former governor of the Federal Reserve and now vice chairman of Macroeconomic Advisors. It's a Washington consulting firm. Hi Larry. How are you?
LAURENCE MEYER, VICE CHAIRMAN, MACROECONOMIC ADVISERS: Good.
GHARIB: All right. So you believe no change in interest rate policy and no change in the policy statement. But do you think that there will be any dissent at the meeting? As you remember, the last two meetings, Federal Reserve bank president from Richmond, dissented both times.
MEYER: You know, it's really not that important. I think he's put himself in the position where it may be difficult for him to stop dissenting until core inflation begins to moderate. So he might dissent, but that's hardly news any more.
GHARIB: There's already talk in the air about a rate cut some time early next year. Some economists are predicting that there will be a rate cut because we haven't seen the worst of housing yet and that would justify a rate cut. What is your thought on that?
MEYER: Well, I don't expect that to be the case. Right now, there are two sectors that are really creating a drag -- housing and auto production. Every place else the economy looks very resilient. Oil prices are down nearly $20 from their peak. Financial conditions are very accommodative. So we really think the economy is after a relatively weak third quarter, going to begin to recover and return to near-trend growth relatively quickly. That would be our estimation. And very frankly, I don't think the markets have really lost their conviction about the near- term ease. That was much three weeks ago, that was the real story. But right now the markets are not expecting anything through the March meeting. And thee really first easing really comes into market expectations closer to the middle of next year.
GHARIB: So what about inflation? Is it an issue? Is it something to be of concern for the markets?
MEYER: Well, it's a concern for the Feds. Inflation is 2 1/2 by the measure that they focus on, the core PC measure over the last year. That's a half a percentage point outside the comfort zone. It's been at or about the upper end of the comfort zone for three years now so yes. That's an issue. It's too high. It's unacceptable I believe to the Fed. Their belief is that it's going to moderate. As the economy continues to slow for a while, unemployment rate moves up. Some of the temporary factors that were boosting inflation dissipate. Inflation is likely to moderate. If it doesn't, then the Fed will likely feel (INAUDIBLE)
GHARIB: How much is the stock market rally we've been seeing and Dow 12,000 a factor for the Fed?
MEYER: I think it's part of a very important complex of factors that are supporting the economy right now. Equity prices are high. Long-term interest rates are very -- really quite low right now. So it's part of the financial accommodation in the economy that is supporting overall consumer and business spending and producing that resilience that makes likely return to trend growth once the intensity of the housing correction and the cutback in auto production begins to pass through.
GHARIB: Now, you told me that the reason that this is a two-day meeting which is kind of unusual for an October meeting, is that Ben Bernanke is discussing with his fellow governors about more transparency, improving transparency at the Federal Reserve. Can he expect any dramatic improvements from Ben Bernanke?
MEYER: I think we can expect some improvements going forward but this is the beginning. There is not a meeting at which decisions are taken. This is a meeting in which the discussion is really opened up on a range of issues, including whether or not the Fed should move to a more explicit numerical inflation objective, what it should do about its forecast. Should it provide a forecast more frequently? Should it have more detail? Should it have a longer horizon, a whole variety of issues. So this is the beginning of the discussion and all of this issues are very contentious. It will take some considerable work to build a consensus in order to move forward. But I'm sure we will have progress on at least some of those dimensions over the course of the next year or so.
GHARIB: All right, very interesting. Thank you so much for coming on the program.
MEYER: My pleasure.
GHARIB: We've been speaking with Dr. Laurence Meyer, vice chairman of Macroeconomic Advisers.
