One on One with Jack Malvey, Chief Global Fixed Income Strategist at Lehman Brothers
Monday, August 04, 2008
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SUSIE GHARIB: Our guest tonight says the U.S. economy is experiencing a quote, good old-fashioned recession. Joining us now to explain, Jack Malvey, chief global fixed income strategist at Lehman Brothers. Hi Jack.
JACK MALVEY, CHIEF FIXED INCOME STRATEGIST, LEHMAN BROTHERS: Hi.
GHARIB: So tell us what you mean by a good old-fashioned recession. What exactly does that mean?
MALVEY: Well we are seeing certainly behavior that is consistent with the type of recessions we saw in the 1970's and early 1980s whereby car sales are very weak, consumer sentiment is declining. Business sentiment is declining. It is a good old-fashioned recession in the making here.
GHARIB: And how long do you think this good old fashioned recession is going to last?
MALVEY: Well, we're trying to figure that out. I mean officially we haven't entered recession yet. The National Bureau of Economic Research says no. But as you know, the other day, we did see a negative quarter for the fourth quarter of 2007 restated. So it feels like we are in it right now and it could go on for some time in 2009.
GHARIB: So what can the Federal Reserve do to get the U.S. economy out of this rut?
MALVEY: Well they have already done a great deal. They have eased 325 basis points. They provided a variety of new techniques to afford liquidity to capital markets and it's not just their role alone of course. It's fiscal policy and there's been in the U.S. significant fiscal stimulus already enacted and a good possibility that an additional fiscal stimulus. Specifically to the Fed, they can provide the reassurance that as they will tomorrow, that they are certainly looking after price stability and that should conditions warrant down the road, they probably could provide further help.
GHARIB: Are you of the camp that saying that Fed will probably not do anything with interest rates. They will keep them steady at 2 percent?
MALVEY: Exactly right. They haven't moved since March. They are not probably going to move for the balance of this year. And the statement won't be too terribly different from the previous one. Similarly with respect to the next one either. The big question is what is 2009? And we would probably be more in the ease camp sometime in 2009.
GHARIB: I'm sorry, you say you expect to do what in 2009?
MALVEY: We think that the next time the Fed actually does something will be maybe more ease as opposed to tightening as many in the market certainly surmise.
GHARIB: Where do you see short-term interest rates ultimately, let's say by the first quarter of next year?
MALVEY: Well, broadly interest rates have been in an amazing tight range over the course of this last five years plus, so there probably will not be too terribly different than they are right now. But let's go a little bit further, the medium and long end could be a little bit higher hopefully on expectation that normalization of economic activity over the course of 2009. And the front end could be a little bit lower possibly with the Fed maybe swinging into one or two more eases before this recession that we talked about concludes.
GHARIB: All right. You also mentioned fiscal stimulus. There are some economists who are saying that it's time now for the government to come up with a second stimulus package. Do you think that is going to happen and will it really help?
MALVEY: It looks increasingly probable that it will happen. The question is how soon. The sooner the better in terms of really doing something substantive for the economy. If we wait until 2009, it may be the case that it will be too late to really forestall the rebound forces - excuse me healthy usual rebound forces for the U.S. economy, so the sooner the better, personal view.
GHARIB: As you know, American companies have benefited a lot from growth in the international markets. But we're seeing a slowdown in the euro zone countries and the UK. What is the outlook on the global economy and its impact on the American growth and do you expect central banks overseas to be raising or cutting their rates?
MALVEY: Well, the credit correction of the U.S. which began now over a year ago is unfortunately something which spread. The (INAUDIBLE) hypothesis was demolished over the course of last year. So the outlook is for unfortunately, global economic deterioration, not a worldwide global recession like the early mid-70s or the early 1980s necessarily. But it will be pockets around the world that emulate the U.S. in this recession. In terms of therefore rate activity by other central banks, eventually they may move back to the easing trail before they tighten again in our view.
GHARIB: All right, interesting information. Wish we could talk some more Jack, but we got to wrap it up. Thank you so much.
MALVEY: Thank you.
GHARIB: My guest tonight, Jack Malvey, chief global fixed income strategist at Lehman Brothers.
