One on One with Bruce Kasman, Chief Economist at JPMorgan
Wednesday, December 17, 2008
|
|
|
|
SUSIE GHARIB: That bond rally that Jeff just told you about was in reaction to the bold moves announced by the Federal Reserve yesterday. Joining us now to talk about the Fed and the outlook for the credit markets and the economy, Bruce Kasman, chief economist at JPMorgan. Hi, Bruce.
BRUCE KASMAN, CHIEF ECONOMIST, J.P. MORGAN: Hi, Susie.
GHARIB: So the Fed's new strategy obviously is to get mortgage rates down and other rates down. Do you think it's going to work? Is it going to get the credit markets moving again?
KASMAN: Well, I think as you said the Fed is trying right now to use everything it can to get borrowing rates for households and businesses down. I think there's a good chance it can start to work here. Unfortunately, the lags between when that begins to impact on activity are rather long so I think we're hopeful that the Fed can get the financial markets to deliver lower borrowing rates, but I think to get borrowing going and get the economy going we're probably talking middle part of next year.
GHARIB: What evidence do we have to look at to know that this strategy is working and that the credit markets are getting pumped up again?
KASMAN: Well I think the first and most simple way to look at it is to see the effectiveness on the borrowing rates and we're beginning to see that. We need to see it continue and be sustained. The breaking of a link between very weak economic data and tightening financial conditions is, I think, the precondition to get growth going. In addition to seeing rates go down I think we want to see new home sales begin to show signs of stabilizing as the mortgage applications go up. I think we want to see the credit markets show that issuances moving, that the funding markets are showing flows in a healthy way. Those are all indications that what the Fed is doing is beginning to have work and then over time that helps us on the growth front.
GHARIB: Then there's the question of unintended consequences here. I mean, we saw that the dollar has deteriorated. It's gone down in reaction to these Fed moves. Is that a concern? Is that a concern for the economy?
KASMAN: Right now I don't think it is. I think the fear that we should have right now is that inflation gets too low and that a deflationary psychology begins to take hold. I think the Fed is partly using its tools to try to convince us that it won't let that happen. I think the dollar's decline is part of that strategy. It will be helpful in preventing inflation and inflation expectations from going down. And I think quite frankly weaker dollar will help us in the form of forcing other central bankers across the world to ease policy as well.
GHARIB: One thing that surprised everybody yesterday, Bruce, was that the Fed is responding to the economy so aggressively, almost like a fear response and so the question is what does the Fed know that we don't know?
KASMAN: I don't think the Fed knows anything we don't know. We look at the screens. We see what's happening on the street. This is an economy in the throes of a deep economic downturn. Credit markets aren't functioning. And I think as we look forward, one thing the Fed is seeing is that we're digging ourselves a hole that's going to require some pretty strong growth to get out of. And I think you put it altogether. It does require the Fed to act both forcefully and early in order to help us out of these problems.
GHARIB: The markets seem to be saying that the economy is going to be doing better in a couple of months. What is your view? What is your outlook for 2009? Are we going to see a turn? Are we going to see economic activity?
KASMAN: I think we will see a turn but I think to talk about a turn in two or three months is premature. The consumer has gone through a spasm that may be fading a bit now. But now we're seeing business activity not only in the U.S. but across the world really turn negative. I think that has a momentum which is almost certainly going to last three, potentially six months here. I think if the Fed is successful and you combine that with the fiscal stimulus package and the -- just the fading of these drags, I think around the middle of the year we could see an economic recovery take hold. But I think we still have another three, maybe six months here of some pretty bleak economic news ahead.
GHARIB: The news has been bleak. Bruce, thank you so much for coming on the program.
KASMAN: Thank you.
GHARIB: My guest tonight, Bruce Kasman, chief economist at JPMorgan.
