Analysis of the Fed's Decision With Michelle Girard of RBS Greenwich Capital Management & Hugh Johnson of Johnson Illington Advisors
Tuesday, August 07, 2007JEFF YASTINE: Joining us to talk more about the Fed's decision is Michelle Girard, senior economist at RBS Greenwich Capital Management and Hugh Johnson, chairman at Johnson Illington Advisors. Welcome back to NBR, both of you.
MICHELLE GIRARD, SENIOR ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Hi.
HUGH JOHNSON, CHAIRMAN, JOHNSON ILLINGTON ADVISORS: Nice to be with you.
YASTINE: Michelle, first question for you. You know, the Fed comes out and they say economic growth was moderate. Financial markets have been volatile. Credit spreads, excuse me, there is tightening in the credit market and the housing market is having problems. But the Fed says, you know, we still think inflation is our chief problem. What is your reaction to all of that?
GIRARD: Well, the thing is that despite all the factors you listed, the turbulence in the financial markets, the tightening in credit conditions and also the ongoing housing correction, the one point that they also made was that they still expect that economic growth will remain moderate in coming quarters. And I think that's very significant, because it means despite all the volatility that we've had in the bond and stock markets of late, they still have not changed their view about the economy over the second half of the year. And that's why, you know, they feel pretty comfortable leaving rates on hold as opposed to seriously contemplating a rate cut at this point.
YASTINE: And Hugh Johnson, are you disappointed that the Fed didn't throw a larger bone to the credit markets and to equity markets, saying in a way, we feel your pain down here in Washington?
JOHNSON: Not at all disappointed. I know a lot of Wall Streeters are very disappointed. But, you know, the conduct of Federal Reserve policy at a time of problems or some financial distress is really an art. It's not a science. And they can certainly make the mistake of too much too early, which means if they were to cut rates now, in my judgment that would clearly be too much too early. I think they did exactly what they should do and their statement was exactly as it should be which simply said, that changing credit market conditions certainly mean that the risk to growth has become a little bit higher. That tells me they're going to continue to watch very carefully and if necessary, they'll do something. But clearly, they did not make the mistake of too much too soon.
YASTINE: Michelle, I'm wondering, in a way, depending on how things workout over the coming weeks or several months to come here whether this may emerge as Ben Bernanke's first big test as Federal Reserve chairman. And what I'm also wondering is is he playing perhaps a game of chicken here with the markets? In a way saying that we know you know there is a problem, but we're not going to acknowledge it because Ben Bernanke doesn't want to get goaded into something that he doesn't want to do, unless the play really calls for it?
GIRARD: Yeah, I think you make a lot of good points. This is his first significant test as a Fed chairman. And I think that one of the differences between he and his predecessor, Chairman Greenspan, is that I think Greenspan was a little bit more seat of the pants if you will, in approaching policy. Whereas I think Bernanke is more forecast driven, a little bit, perhaps more pragmatic. And I think therefore it's going to take more to ultimately get the Fed to respond to financial market treatments. They want to see some tangible signs that it's having an economic impact. You know, they've responded to financial crises before in '98, in 2001 and in both cases it was a little bit perhaps overdone. In '98 we ended up having an overheating that the Fed had to reverse very sharply. So I think it's going to be a little bit more patient here than perhaps people were expecting. YASTINE: And Hugh Johnson, you've mentioned before about the art and the science of being a Federal Reserve chairman. Is Bernanke, Ben Bernanke enough of an artist to carry this one off?
JOHNSON: Well, only time will tell that. I think he is. You know, the one mistake as I mentioned is too much too soon. The other mistake which we have to keep in mind is too little too late. That all depends, as Michelle has said, on incoming data. The data is really going to dictate when the Federal Reserve needs to move, if they ever do need to move. And so we'll just have to wait and see. Quite frankly it will be history that will judge whether he's an artist or not. My guess is based on what I've seen so far, he's very good at this. He's very sensible and most importantly, he has a real good understanding of what to do in a crisis, at least based on financial and economic history. He's a real good economic historian.
YASTINE: Michelle, final question for you in about 20 seconds. What is your sense of the state of the credit markets right now as far as the ability of companies to get the lending that they do need?
GIRARD: Well, I think that what you're seeing is that credit is being shut off to sub-prime borrowers, whether we're talking about consumers or corporations. But the important point is that high-grade companies that are coming to market are being able to get business done. It's certainly at a reduced rate and at higher yield levels and higher costs. But the markets are not entirely shut down and that's what the Fed would be watching for.
YASTINE: All right, thanks to both of you. Our guests Michelle Girard of RBS Greenwich Capital Management and Hugh Johnson of Johnson Illington Advisors.
