One on One William Poole, President of the Federal Reserve Bank of St. Louis
Thursday, March 08, 2007
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SUSIE GHARIB: The direction for U.S. interest rates will be decided in 12 days when the Federal Reserve holds its big policy meeting. What's the thinking inside the Fed? A short while ago, I talked with one of the Fed's top officials, William Poole, president of the Federal Reserve Bank of St. Louis and a voting member of the FOMC. My first question, what shape is the economy in?
WILLIAM POOLE, PRESIDENT, ST. LOUIS FEDERAL RESERVE BANK: Susie, I think the economy is pretty evenly balanced. A conventional forecast that I share, just rounded off, GDP growth around 3 percent and inflation gradually moderating. So that is what the outlook is for the next four, eight quarters, even.
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GHARIB: Mr. Poole, when the housing sector was booming, the economy benefited greatly. How vulnerable is the economy now that the housing sector is in a slowdown?
POOLE: Well, so far the housing slowdown has not spread to other sectors. So if the housing slowdown remains in that sector, doesn't spread, damage doesn't spread, then I think that the economy is going to be just fine.
GHARIB: We hear every day headlines about concerns about the sub- prime mortgage area. Are they a threat to the economy?
POOLE: I don't think the sub-prime sector is a threat to the economy in general. It's obviously a threat to lenders that were overextended in that area. And it's a threat to the individual households that got themselves overextended with sub-prime mortgage obligations.
GHARIB: Mr. Poole, as you know, there has been considerable debate about whether the economy might be headed for a recession. Where do you stand on this debate?
POOLE: Well, I think that debate was perhaps started, at least most visibly by former Chairman Alan Greenspan. And I think he threw out the probability, something like one chance in three. Even when the economy is booming if you look at statistical models, there is almost always a probability of something like 10 or 15 percent. So it's elevated a little bit. But to me, we just don't see, I just don't see that as a high probability, certainly nothing that requires policy response at this time. We shouldn't respond on the basis of sort of speculation about where things might go.
GHARIB: Well, the financial markets also seem to be signaling that the economy is getting weaker. But the emphasis at the Fed is still on inflation. What do you think that, could be a catalyst that would make the Fed rethink its balance of risk?
POOLE: Well, let me tell you my assessment with the information now available. I think that the odds are pretty evenly balanced that we would get some inflation news on the high side, that would be unfortunate above expectations. Or that we would get information on employment and output on the low side of current expectation. I think those risks are pretty evenly balanced. It is certainly the case, though that the inflation risk is the more serious one from my perspective, and would require quicker action to deal with.
GHARIB: So you don't see that the data that's coming out right now weak enough to be worried about an economic slowdown?
POOLE: Not yet. Now of course we've got the important employment data coming in tomorrow. And we could have a string of information that would add up to a change in that picture of what I regard as the standard forecast, roughly speaking rounded off, about 3 percent track for real GDP.
GHARIB: We've seen the financial markets come unglued recently. What do you think the markets are telling us?
POOLE: There was no message that I could read. Now whenever you see something happen in the markets that has no obvious explanation, obviously you have to keep your eyes and ears open to find out if there is a logical explanation. But I haven't seen one as yet.
GHARIB: When the financial markets are as volatile and unstable as we've seen recently, how does that factor into Fed policy?
POOLE: I can tell you the way I factor it in and that is since the declines and then the increases after that were largely or completely a mystery to me, I take it as being noise, indeed a substantial amount of noise. But if it is unexplained, if you didn't know where it comes from, you can't possibly have an idea of what policy response might be appropriate.
GHARIB: A quick question to follow up on what you were saying about former Fed Chairman Alan Greenspan. Do his comments about the economy make it difficult for the Fed to make policy?
POOLE: No, absolutely not. He is obviously a very wise and experienced person. He's always worth listening to. And so the fact that the market listens to him is perfectly sensible. We listen to him. But I don't necessarily always agree with him. And in this case I think I would put my judgment on the probability of a recession somewhat below the one that he had quoted.
GHARIB: All right, Mr. Poole, thank you so much for your time. We really appreciate your coming on the program.
POOLE: Susie, good to be with you.
