One on One with Stuart Hoffman of PNC Financial Services Group
Tuesday, August 21, 2007
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SUSIE GHARIB: Our guest this evening will be addressing the nation`s leading economists tomorrow about the Fed`s actions in the face of financial turmoil in the markets. Tonight, we get a preview from Stuart Hoffman, chief economist at PNC Financial Services Group. Hi, Stuart.
STUART HOFFMAN, CHIEF ECONOMIST, PNC FINANCIAL SERVICES GROUP: Hi, Susie.
GHARIB: Well, give us your assessment of the Fed`s actions so far in dealing with all this financial turmoil.
HOFFMAN: Well, I think the Fed has done a good job. They`re walking a fine line. Initially, they added reserves to the system fairly forcefully. Obviously, as we`ve talked about on Friday, they added a statement that I thought indicated that, as opposed to the last meeting where they said they were more concerned about inflation, now they said the downside risk to the economy was increasing, and their word was appreciably. They added reserves, they cut the discount rate. That`s sort of like the supporting actor of what the Fed can do. And I think that`s a warm-up to what`s likely to be a cut in the more important Fed funds rate. I really don`t think the Fed wants to do it before their meeting on September 18th for fear this may smell like a bailout or a panic, emergency situation. But the economic data looked a little more iffy and we are certainly seeing layoffs, the effect on housing, and better inflation data, particularly from lower energy prices, I think on September 18th, when the Fed next meet, we will get a cut, a quarter of a point cut in the Fed funds rate. That would be an orderly and I think a well-timed cut, and the markets could use it.
GHARIB: So you heard our report at the top of the program that Senator Dodd met with Fed Chairman Ben Bernanke and said that he was assured that they would do the right things and that the Fed will use whatever tools that they have available. So one of those tools, then, would be cutting the interest rate, and you think it`s going to happen?
HOFFMAN: Yes, the Fed`s already cut the discount rate. The Fed basically has three tools. I mean, they add reserves to the system. They`ve done there that through buying securities. They can cut the discount rate and they can cut the Fed funds rate. Now, to do that, they also have to add reserves to the system as they have done, but they would add even more, and the cost to those reserves, the interest rates, rather than being at 5.25 percent, if the Fed wanted, could add enough reserves to get it down to 5 percent on a permanent basis. And that`s what I think they`ll do. But it may still be a couple of weeks away, rather than something they`ll do between.
GHARIB: Immediately.
HOFFMAN: . now and their meeting.
GHARIB: Right. There seems to be some debate within the Fed, because Richmond Fed President Jeffrey Lacker came out today saying that he didn`t think that the Fed necessarily should cut rates to solve all this financial volatility in the markets unless the economy really warranted it. But do you think that Fed Chairman Ben Bernanke feels pressure to cut rates because of what`s going on, on Wall Street?
HOFFMAN: Only to the extent, as President Lacker said, that it`s going to spill over onto Main Street. And how can it help but do some of that? In the mortgage market, we learned within the hour that consumer confidence in the week just ended took quite a nasty decline. Now, sometimes consumers spend better than they say they feel, and in the report you said earlier about Target sales being online is encouraging. But I think Chairman Bernanke is sort of balancing his own committee, but the thing is to do the - to cut the Fed funds rate for the right reasons at the right time, and I think it`s particularly evident that inflation threats are receding and there is some fallout on Main Street in jobs, in housing, in confidence and spending, it will be appropriate for the Fed to cut the Fed funds rate. Maybe though it will be in the middle of September when they meet, and I wouldn`t be surprised if they followed that up with another quarter point cut at one of their meetings in either October or December.
GHARIB: When you talk about the spillover effect, to what extent has the spillover already begun, and is it going to be enough to put the economy at risk of a recession?
HOFFMAN: I don`t think there`s a recession out there. The risk has grown. Maybe I`d say it`s a 30 percent chance, but that`s still lower than that we won`t have a recession. So I think the risks have grown, but I think the U.S. economy will avoid a recession with the rate of growth, of consumer spending -- certainly housing will be weak. Fortunately, we have a strong global economy, which was discussed today and Treasury Secretary Paulson has talked about that, to help mitigate that in a strong non- residential construction. So I think the U.S. will avoid a recession, but there`s got to be some spillover to the economy from the problems on Wall Street coming home to roost literally and figuratively on Main Street.
GHARIB: All right. Thanks a lot, Stuart.
HOFFMAN: Thank you, Susie.
GHARIB: My guest tonight, Stuart Hoffman, chief economist at PNC Financial Services Group.
