Mike Holland of Holland & Company & Brian Wesbury, of First Trust Advisors Review The Fed's Decision To Leave Rates Alone
Wednesday, May 09, 2007
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SUSIE GHARIB: More analysis now on that Fed decision today to hold rates steady. Joining us Mike Holland of Holland & Company and Brian Wesbury, chief economist of First Trust Advisors. Good evening gentlemen.
BRIAN WESBURY, CHIEF ECONOMIST, FIRST TRUST ADVISORS: Good to be with you Susie.
GHARIB: Brian, let me begin with you. What was your interpretation of the Fed decision today?
WESBURY: They had a little bit of a look back and they said, hey, the economy was slow and inflation remained a little bit elevated and that's fine, because they looked back. But when they looked forward, basically they kept their statement exactly the same and that is, it looks like the economy will ride out the correction in housing and they're still worried about elevated inflation. And since their predominant concern, that's the word they used, is inflation, they're nowhere near easing monetary policy. I still believe by the end of this year because the economy will snap back, I expect it to, that they will actually have to hike rates.
GHARIB: All right, Mike, what do you think? Do you agree with what Brian's saying?
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Brian and I go back a long way and no I disagree completely. I think that by the end of the year, it will clear that the Fed has been too tight for too long. I think that they have a restrictive monetary policy right now. The interest rates are too high. The overnight rate, the Federal funds rate is above the whole Treasury bond market yield curve. So I think that there's a governor on this market. They're slowing down the U.S. economy at a time when both gasoline prices, which are hiked and also house prices, which are moving down a little bit are not helping the economy. So we do have some slowing in the economy. I think they're going to have to change their way.
GHARIB: And on top of what Mike was saying Brian was that also say that job growth is slow. The GDP for the first quarter was slow. Isn't that all enough to justify a rate cut?
WESBURY: I don't think so and Mike and I are good friends. It's great to have this debate. The last three quarters of GDP have been weak, about 2 percent growth. But it's because of a huge drop in housing, which I think is a sector-related problem. It's not an economy-wide problem and it's not due to excessively high interest rates. If you take away housing, GDP has been growing above 3 percent. The rest of the economy is strong. Manufacturing is doing well and yes, the employment numbers have come in a little bit weaker, but that's expected. That's a lagging indicator. The more leading indicators, the Institute for Supply Management, both manufacturing and services numbers last week when they came out for April were very strong. Looks to me like the economy is picking up.
GHARIB: All right, Mike, if you believe in interest rate cuts, how soon and how deep?
HOLLAND: Well, as Brian just enunciated, there must be people at the Federal Reserve who vote for Ben Bernanke today who were espousing exactly what Brian - so I think we're in for a long period according to what we're hearing from Fed speakers all the time, have no change in the 5 1/4 that we have. And I think that's a problem for the economy. I don't want to overstate it, but I think the market today was - the stock market - was pleased that they didn't screw up anything any more than they have.
GHARIB: I was going to ask you actually about the market reaction, because the Fed does nothing and then the markets interpret this do-nothing decision as a positive event. Why so?
HOLLAND: My reaction was the same as the markets, a sign of relief that they didn't do something untoward. They've already done something which I think is a little goofy by having these interest rates overnight so high as they are. If that's the worst that they do, I'm happy with that.
GHARIB: Let me ask you Brian. (INAUDIBLE) Go ahead.
WESBURY: I was just going to say, I think there's another reason that the market reacted this way and that is, there's this sense in the market that the Fed knows something we don't. And every time they come out with a statement and they don't say, oh no, sub-prime lending or the housing market's about to take down the entire economy or there's systemic problems out there. Every time they don't say that, we breathe a sign of relief. So I don't necessary think it's just about rates. I think it's also about whether these problems are spreading and becoming worse than people think they might be.
GHARIB: One of the problems that I hear from time to time from some of our guests who come on the program is their concerns about stagflation, slow growth plus inflation in the economy. Brian, do you think that that's at all a possibility?
WESBURY: I don't think so. I think we've been through a weaker period of growth, but growth is going to pick up. Nominal GDP should accelerate by the end of this year with both a little bit of higher inflation and a little bit higher real growth. That's not a stagflationary environment and I think that's an overly pessimistic view of the economy.
HOLLAND: Susie, if I could just jump in here. Inflation has gone down during this year. We were at a high of 2.8 percent, which by the way is relatively low compared to what the Fed has engineered over the decades. It's gone down from 2.8 to 2.1, the most recent reading. They said they want 2 percent. They're pretty close. There was no reference to that in their
statement, so I think Brian's right when he says that they're still vigilant.
GHARIB: Real quickly, Mike, what is your investing strategy in this economic climate that we're in?
HOLLAND: No question the companies outside the U.S. or companies in the U.S. who do a lot of business outside the U.S. are going to benefit from accelerating growth outside the U.S. as we have slowing growth in the U.S. So I think (INAUDIBLE) investing companies that have exposure to overseas markets.
GHARIB: And Brian, real quickly, between now and the next Fed meeting on June 28th, what is the most important economic data that you're going to be watching?
WESBURY: Well we always watch the employment report. I think we'll see a rebound in that, but more importantly, I watch those weekly initial unemployment claims. They're still very low. They've always crept higher before every recession in the past. They haven't done so so far. And then that Institute for Supply Management number, they've been picking up. I'm looking for that to continue.
GHARIB: OK, Brian, Mike, thank you so much. We appreciate you coming on the program. My guests tonight, Mike Holland of Holland & Company and Brian Wesbury, chief economist of First Trust Advisors.
