Michelle Girard of RBS and Michael Farr of Farr, Miller, Washington on The Fed Optimism
Wednesday, August 12, 2009
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SUSIE GHARIB: Joining us now with more analysis on the Fed, the economy, and the markets -- Michelle Girard, senior economist at RBS and Michael Farr, president of Farr, Miller, Washington and author of "A Million Is Not Enough." Michelle, Michael, nice to see both of you.
MICHELLE GIRARD, SENIOR ECONOMIST, RBS: Good evening.
MICHAEL FARR, PRESIDENT, FARR, MILLER & WASHINGTON: Thank you.
GHARIB: Michelle, let me begin with you. You heard our report. The Fed is saying that the economy is leveling out. To you, is that the Fed's way of saying things are OK now?
GIRARD: Yeah, well, there's been growing evidence that perhaps the recession that we've been in since the end of 2007 is over and I think that that's probably true. When we look back, I think the official end date will probably be sometime here in the third quarter. And I think that that's what we saw the Fed acknowledge. But very importantly, they also continue to signal that even though activity is leveling out, they still expect to keep rates low for an extended period. So you can see that even though they are acknowledging some improvement in the economy, they'll see some vulnerability and they certainly do not want market participants translating the improvement in the economy into the prospect of the Fed raising rates any time soon. That is still not on the radar screen.
GHARIB: Michael, do you agree with Michelle? What's your take away of the Fed decision?
FARR: I thought it was an expected decision, but all in all, it was pretty good news. Before they said that the economy was still contracting, but the contraction was slowing, that it's leveling off right now, that they're seeing some positive growth in the rate of change, that's pretty good. But they're sort of calling for -- "Washington Post" said today they're calling for a recovery that only a statistician can love. And I love that line because basically it means that we're sort of leveling out but we're not looking forward to any tremendous growth. We have avoided a lot of dire scenarios, so there's a lot to feel good about I think in this release today. I'm not sure that you translate that in rushing out to buy stocks.
GHARIB: Exactly. I think Michelle the point that Michael is making is a good one, because the Fed is still saying that there's ongoing job losses, sluggish income growth. Most people don't feel that this is really a recovery.
GIRARD: Right. Well, that's the tricky thing. It's like a stock. People have likened it very much to a stock that falls from $100 to $10, even if it goes up to $20, it's double, but it's still down so sharply. And I think that that's very similar with respect to the economy. It's possible that we'll see growth rates that look quite healthy, but still the overall level of activity is going to be very low. And that's why it's very much like Michael said, we're statisticians. We'll see the signs of growth, the signs of recovery, but for most people, they won't necessarily feel that. Things have gotten a whole lot better.
GHARIB: Michael, let me pick up on what you said a moment ago about the stock market. So are you saying investors should not feel confident at this time about putting new money into the stock market even though there was a big rally today?
FARR: I think that investors ought to continue to be cautious about committing dollars to the stock market. The stock market is up some 50 percent since the lows in March. It's been a tremendous run. Maybe the selling was overdone and we were looking for a really amazingly dire scenario in March, things really failing. Things have sort of built back, gotten together. But we've gone from a market that was selling at 10 times earnings up to now 16 times earnings. And most of that gain has all been in the multiple expansion. What I mean really basically is that for every dollar in earnings, people were willing to pay $10 a share in March. They're now willing to pay $16 a share. But there hasn't been any real increase in those earnings. The fundamentals have not driven this market advance. So when you see prices go up with that fundamentals behind them, I think you have to be a bit cautious. It tells you that stocks are getting a bit pricey.
GHARIB: And there could be new developments in the bond market, because, Michelle, today the Fed said that they are going to start pulling back from buying Treasuries. What could be the consequences of that?
GIRARD: Well, it's funny, I don't think that the Treasury buying, excuse me, the Fed buying of Treasury securities has really done a lot to keep Treasury yields down. But the Fed has also been buying mortgage- backed securities and agency debt. And there I think we've actually seen some tangible impact and I think that's what's been important. They are winding down the Treasury purchases, but they are going to continue to buy mortgage securities and I think that that will help to keep mortgage rates from rising, even if Treasury yields start to move up. I think that the ongoing purchase in the mortgage sector is going to provide some underlying support for the housing market (INAUDIBLE) slowly make a bottom and perhaps even start up very modestly by the end of the year.
GHARIB: We have less than a minute left. Go ahead, Michael.
FARR: Michelle, I thought the interesting thing there too was the Fed's giving us an indication of how they are going to sort of terminate some of these programs, not just a dead stop at the end of September, they're going to sort of taper it off. And I think that gives us a sense of what they might do with a mortgage- backed repurchases and at the next Fed meeting I think one thing that Wall Street is going to be looking at is, are you going to follow through guys? You said you were going to do it. Are you really going to do it? Are you going to stick to your word and when are we going to hear about the next program that might be also slowing down. I think it's very important this language.
GHARIB: Real quickly, because we have just a limited amount of time left, I want to ask both of you, do you think that Ben Bernanke is going to hold onto his job as Fed chairman? There are only four meetings left between now and the time that his term ends. Michael what do you think?
FARR: I think that he will. I certainly think that he should. But my guess is that he will. I think the naysayers are in the wrong camp on Ben.
GHARIB: Michelle?
GIRARD: I agree. I think he will and particularly if the economy continues to show improvement, I think with every passing day his odds of re-nomination go up.
GHARIB: We'll see. We'll check back with both of you on that. Thank you again for coming on the program, really appreciate it.
GIRARD: Thank you.
FARR: Thank you.
GHARIB: My guests tonight, Michelle Girard of RBS and Michael Farr of Farr, Miller, Washington.
