David Jones, Chairman of DMJ Advisors Reacts To Fed's Last Meeting
Tuesday, August 28, 2007
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SUSIE GHARIB: Joining us now with more analysis, noted Fed watcher David Jones, chairman of his economic consulting firm, DMJ Advisors. Hi, David.
DAVID JONES, PRESIDENT & CEO, DMJ ADVISORS: Nice to be with you, Susie.
GHARIB: David, you have been following the Fed for years. What is your analysis of the thinking inside the Fed these days?
JONES: Well, Susie, that August 7 meeting that we just received the minutes for hinted that the Fed was missing the brunt of this severe credit crisis. They were still talking about fighting inflation. They mentioned the crisis, but their main priority was on really leaning toward the tightening side and fighting inflation. The markets were very disappointed in this because the markets were hoping that they would get a hint, at least back on August 7 of what was to come. Now, obviously the Fed has moved, cut that discount rate, as you said, changed its bias toward a weaker economy. But the trouble is, Susie, that they're behind the curve.
GHARIB: So are you saying that Ben Bernanke really isn't in tune with what's going on in the financial markets and the actions that he's taking so far, are they going to solve the crisis?
JONES: Well, the markets are unsure about whether or not the Fed will solve the crisis. That's the problem. Chairman Bernanke is new in the job. He has a lot of new people with him at the Fed. They have an academic bent. They're not street smart like his predecessor Alan Greenspan was and the fear in the markets is that the Fed will remain behind the curve. My argument is that Ben has to do more. They have to start doing it not any later than the September 18 policy meeting.
GHARIB: You told me that the odds have increased that the U.S. economy is headed for a recession. When might that happen and why do you believe that?
JONES: Well, it depends on how long this credit crisis lasts, Susie, but these markets just seized up all the way from the commercial paper market through the corporate bond market, particularly high-yield bonds, the mortgage market. Borrowers simply couldn't get money at reasonable terms. And if that goes on for a few more weeks, the danger is that that shutoff in the credit valve will lead to a major decline in economic activity. I don't think we're going to hit a recession, but the odds have gone up to maybe something around 45 percent, almost 50-50 and the Fed has to act to try to protect the economy from that possibility of a recession.
GHARIB: You've probably seen that the Fed funds futures contracts are pricing in several rate cuts between now and the end of the year. What is your view of what's going to happen over the next couple of Fed meetings?
JONES: There have to be several rate cuts, perhaps starting at that September 18 meeting. The way I would look at it, Susie, is we probably need about four rate cuts over the next five Fed policy meetings going out through early March of next year. That would bring us down a full percentage point. The key here is to push short-term rates down so that banks have a better spread between what they pay for money to lend in terms of short-term rates and what they can earn in longer term rates on their loans and investments. We have to improve that interest margin for banks which have been hard hit in this stock market downturn.
GHARIB: Fed policymakers and other central bankers are going to be meeting this weekend in Jackson Hole, Wyoming. It's often a time to make headlines. Do you think that Ben Bernanke is going to make any headlines that will be market moving?
JONES: Well, I only can mention what he should do. This is prime time for him. It's almost make or break. Because remember Chairman Greenspan came in and had a stock market crash in 1987. He handled that well. He handled the emergency well, pumped a lot of emergency liquidity into the economy. The question is can Chairman Bernanke handle this credit crisis as well? He's still in the test period, but his speech this Friday is very important.
GHARIB: All right, David. Thank you so much, very thoughtful comments, appreciate it.
JONES: Thank you.
GHARIB: My guest tonight, David Jones, chairman of DMJ Advisors.
