One on One with Bruce Kasman, Chief Economist of JPMorgan
Wednesday, June 11, 2008
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SUSIE GHARIB: The Federal Reserve said today those high oil prices are squeezing consumers, causing the economy to weaken further. That was the conclusion of the Fed's latest beige book survey of regional economic conditions. Joining us now with more analysis, Bruce Kasman, chief economist of JPMorgan. Hi, Bruce.
BRUCE KASMAN, CHIEF ECONOMIST, JPMORGAN: Hi, Susie.
GHARIB: Well, the Fed's report described a shaky economy burdened by rising oil and food prices. How shaky is the economy? KASMAN: Well I think the beige book is a pretty dark shade of gray right now, which is to say the economy is pretty weak across most sectors. It's pretty weak across most regions and there's only very few signs of real growth in the system right now. If there's any good news here, it's that the report that came out today didn't show conditions deteriorating from the last time the survey was taken in April.
GHARIB: So would you characterize it that the economy is in recession right now?
KASMAN: Well, I think the economy is in what I'd call a recession dynamic, which means that jobs are being cut, incomes are being squeezed by higher energy prices and there's a lot of weakness across sectors. We're not contrasting in terms of GDP and we're not seeing the kind of weakness in labor markets that we normally see in the midst of a recession so it's a clearly very weak and painful dynamic, but it's not nearly as painful in the broad sense as we've seen in the last three or four economic downturns.
GHARIB: All right. And this week we heard from Federal Reserve Chairman Ben Bernanke and other Fed officials talking a lot about their concerns about inflation and seem to be hinting of a change, a shift in policy towards the way that they are going to be handling interest rates. How do you think the Federal Reserve is going to respond to this current economic condition?
KASMAN: Well, the economy still remains weak and financial conditions are fragile. We don't believe the Fed is prepared here to raise rates in the near term, but the Fed I think is telling us that it's not seeing the kinds of downward dynamic in growth or the financial stresses that has moved it to lower interest rates to 2 percent. As a result of that and their concerns about inflation, they're shifting their assessment of risk. I think what that tells us is that we should be prepared for a rather early adjustment in rates. Keep in mind that when I say early, I mean something around the turn of this year or early 2009.
GHARIB: All right. Do you think that the economy can do better as long as oil prices keep going up? Is there a breaking point?
KASMAN: I think in the past what we've seen is that oil by itself is damaging, but oil really does a lot of damage to the economy when it generates inflation and it causes higher interest rates. The fear we should have right now is there's a whiff of that in the picture in terms of what we've been seeing in recent weeks. And I think the real issue here is can we break the cycle, either oil comes down or the interest rate picture changes because people lose the concern that oil will feed into higher inflation. But right now we're seeing a very dangerous dynamic of oil going up alongside interest rates going up. That in the past has been the recipe for the breaking point. If that would continue for any meaningful length of time here, I think the risk to the economy would magnify.
GHARIB: Bruce, is there any silver lining in all of this?
KASMAN: The silver lining if there is one is that we haven't done nearly as badly as people had feared at the start of the year that the global environment, while it's helping to push oil prices higher, is also supporting us in a number of different ways: exports, corporate profits and the like. While this is a very painful environment, we are grinding through it without having lost any real momentum over the last two or three months.
GHARIB: Bruce, thank you so much. Thanks for putting it in perspective for us.
KASMAN: Thank you.
GHARIB: My guest tonight, Bruce Kasman, chief economist of JPMorgan.
