One on One with Brian Wesbury, Chief Economist with First Trust Advisors
Tuesday, November 20, 2007
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SUSIE GHARIB: Joining us now for more analysis of the Fed's outlook and oil prices is Brian Wesbury, chief economist with First Trust Advisors. Hi, Brian.
BRIAN WESBURY, CHIEF ECONOMIST, FIRST TRUST ADVISORS: Hi. Good to be with you, Susie.
GHARIB: Brian, with this new information from the Fed today, do you think it`s going to cut interest rates at its December meeting or stay on hold?
WESBURY: No. I`m with Lyle Gramley in that I think that the Federal Reserve wants to not cut interest rates. They`ve cut them 75 basis points or 3/4 of a percent so far which by the way is exactly the same thing they did after the 1987 stock market crash and after the 1998 long-term capital management and Asian financial flu crisis. So this is about a normal kind of cut for an emergency and I think they want to be done and I don`t read anything in their forecast today that says they need to cut any further.
GHARIB: As you know there`s a raging debate about to cut or not to cut and some of the market analysts and economists I talk to say, with oil at $98 closing in on $100, with retailers saying it`s going to be not a great holiday season and with housing woes continuing, that it`s justified to have a cut. What do you say to that argument?
WESBURY: First of all, I think interest rates are already extremely low. If you go back and you compare interest rates today to the late 1990s, that boom period between 1995 and 1999, it doesn`t matter what interest rate you look at -- the 30-year mortgage, the 10-year Treasury, the Federal funds rate -- they`re all significantly lower today than they were during that boom which tells me there`s some other problem with the economy today. Obviously high oil prices are a problem, but cutting interest rates just sends oil higher. I mean that`s what we`ve seen in the last couple of months. The problem with housing isn`t because interest rates are high. It`s because we had too lax credit standards. We gave loans that we should have never -- we`ve made loans that we should never have made and as a result, we`re going to have to live with the pain working through that. And then finally, on the Christmas shopping season this year, unemployment is still 4.7 percent, wages are growing, wages and salaries are up 7 percent in the past year. I think there`s a lot of pent- up demand and I think Christmas shopping is going to be a lot stronger than many people think.
GHARIB: Interesting. What about this whole sub-prime mess? I mean since the October Fed meeting, we`ve seen Citigroup, Merrill Lynch, Bank of America doing more write-downs because of the sub prime mess. And of course today`s news about Fannie and Freddie also feeds into that same issue. To what extent do you think Fed policy will be influenced by those stories?
WESBURY: I think the Fed is definitely concerned about that, but their concern goes a little bit deeper than just whether there`s losses or not. And by the way, these losses are all reflective of activity that was done months or years ago, making these bad loans and now we`re paying a price for that. The Fed is worried about or they should be worried about whether there`s enough capital in the banking system. In other words, can new loans be made or are banks in trouble? We heard a little bit of talk about Freddie today maybe needing to raise some capital. But we`re not hearing that from other banks. I think the banking system is well capitalized and in very good shape.
GHARIB: We`re down to about 30 seconds now. What about the weak dollar and hitting a new low against the euro today? What impact could that have on the markets and the economy?
WESBURY: I think the weak dollar is just another sign that the Federal Reserve is too accommodative in its policy. It`s printing too much money in order to hold interest rates down and what that does is cause a weak dollar. All this noise about OPEC countries wanting to switch to the euro or not buy oil in dollars any more, that`s just a lack of understanding about financial markets. Because I can hedge anything in any currency I want to on the foreign exchange markets today. If you try to give me dollars I can switch them to euros immediately so this idea that nobody wants dollars anymore, they can already get out of them if they want.
GHARIB: All right, Brian, thank you so much, always a pleasure to hear your views on the economy.
WESBURY: Thank you, Susie.
GHARIB: My guest tonight, Brian Wesbury, chief economist with First Trust Advisors.
