Thomas Hoenig, President of the Federal Reserve Bank of Kansas City & U.S. Treasury Secretary Henry Paulson Offer Their Outlooks On The Economy
Thursday, September 06, 2007SUSIE GHARIB: Upbeat assessments of the U.S. economy today from top officials at the White House and the Federal Reserve. In an exclusive interview with NIGHTLY BUSINESS REPORT, Treasury Secretary Henry Paulson said the economy will quote pay a penalty because of the turmoil in the financial markets.
But first, in another exclusive interview, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, told me most of the economy is doing quote reasonably well and that the problems in the housing sector haven't spilled over to the broader economy. Hoenig is a voting member of the Fed and is one of 10 people deciding whether to cut interest rates when the central bank meets September 18. When I talked with Hoenig today, I began by asking him to characterize the health of the economy.
HOENIG: I think generally we have what's mostly described as steady moderate growth and I think that describes it well. When you look back a little bit at the data, you look at personal income growth, you look at the business earnings and where we are with government spending and so forth, I think it does bode well for the U.S. economy as far as overall GDP growth in the third quarter. Obviously, the housing, especially the sub-prime elements of the housing market, are the slowing part of the economy or the slowed part of the economy. But I think that that is one element of the economy, but the rest of the economy continues to do reasonably well.
GHARIB: But Mr. Hoenig, many economists are saying that the odds have increased that the U.S. economy could go into a recession. Have they increased enough to worry you?
HOENIG: Well, I think the economy overall still continues to show growth and I think we will show growth in the third quarter above 2 percent and for the year as a whole above 2 percent. We had a good second quarter, 4 percent GDP growth, so I think that is really the story that's out there.
GHARIB: Are you saying that right now, the problems in the housing sector and these mortgage market problems haven't yet spread into the broader economy? Because some people feel that it already is.
HOENIG: Well, I don't see the strong evidence that it has carried over into the broader economy. When you look at the income growth, the level of activity that we are seeing when we survey the country, we find that most of the economy is doing reasonably well. We still have good export demand for our goods, which is helping our manufacturing and carrying it, so I don't see that it has carried over at this point. And I think our responsibility is to watch that very carefully going forward and that's what I am very confident that we will do. The future is an unknown. Just by definition, the future is unknown and so that's why we do have to be diligent and watch these data as they come out over the next several weeks and months.
GHARIB: The people I talk to on Wall Street believe that the measures that the Fed has taken so far have not worked, whether you are talking about cutting the discount rate or injecting money into the banking system, and they believe that a rate cut is justified. What are your thoughts on that?
HOENIG: Well, I won't talk about a rate cut or anything like that. I will say that what we have done so far is provide liquidity of the central banks in the United States, Europe and elsewhere have provided liquidity into the market place, which has been very important and I think have been very helpful to address liquidity issues that were, in fact, out there. So, I think it has been useful to do that and I think important that we did that. And that's part of our mandate and that is to provide liquidity into the market as one element, and then to look at the real economy and judge it as far as future policy goes. And we won't know on that until the time comes to make the decision. And we will watch the data going forward.
GHARIB: As you watch the data, as you monitor the economy, what do you need to see happen in the economy that you would feel comfortable in supporting a rate cut?
HOENIG: There's no one thing that you should look at or can look at. If it were that simple, anyone can do it. I think the main thing is to look at the broad economic data that come out as we go forward, the whole string of data. You have to form judgments based upon on a broad base of information and that's really what we have to do as we go forward. And then, at the time that a decision is called for, make that decision based on the data you have at that time, the accumulation brought forward to that time and then make your decision.
GHARIB: Speaking of data, Chairman Bernanke has says (ph) the usual monthly economic reports are old news and not as useful in this environment, so what is the Fed doing differently? What data are you looking at so you can figure out what's going on?
HOENIG: What I'm doing is following very carefully the new data that are coming out, surveying businesses around our region. And more broadly than that to see what in fact they are able to tell us about demand for their product, how they are looking at their decision-making, so that you have somewhat more of a prospective look on the economy. And in fact doing that I have found that most businesses are continuing to move forward and that to me is an encouraging sign and I think that is reflected importantly in the recent survey and reflected in the so-called beige book.
GHARIB: Everyone I talk to wants to know when this whole financial credit crunch crisis will be over. If the financial crisis were a baseball game, what inning are we in?
HOENIG: I don't -- that's a metaphor that I think has been used before. But I don't pretend to be able to put a timeline. The thing about economics, of course, is that we know there's laws of supply and demand. We know how markets work in generally, but the timing of that is always affected by the psychology of the consumer, the psychology of the business person and that will affect the timing. And so we just have to stay attuned and alert and continually watch the markets and data, and survey the markets and data to be able to judge our -- judge where we are in moving towards the general improvement in the economy which I think we have right now in place.
GHARIB: Mr. Hoenig, thank you so much for talking to NIGHTLY BUSINESS REPORT. We really appreciate your time.
HOENIG: And I appreciate yours as well. Thank you.
SUSIE GHARIB: GHARIB: Thanks Jeff. Back now to our other top story. Treasury Secretary Henry Paulson believes the economy will withstand the turmoil in financial markets. But the market jitters are raising borrowing costs for companies and consumers. NIGHTLY BUSINESS REPORT Washington bureau chief Darren Gersh sat down with Paulson today and began by asking whether that will take a toll on growth.
PAULSON: There are real strains in the capital markets and across some of the credit markets. And I think this will take awhile to play out. And, you know, almost certainly, you know, over time this will have an impact on our economy. There will be a penalty to our economic growth. I'm still quite comfortable we're going to continue to grow, create jobs. We have a very strong economy against the backdrop of this -- of these stresses and strains in the capital markets.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, I have heard estimates that it could take as long as six months for the markets to sort of work through the stress right now and then another couple of years to work through the sub-prime mess. When you say awhile, define awhile for me, what does that mean?
PAULSON: Listen, I certainly wasn't predicting six months to work through the stresses and strains in the capital markets. It's going to be -- it is certainly going to be into the weeks, maybe a number of months. I have a difficult time making projections. But it will be awhile.
GERSH: The Fed agrees with you and says that the economy is doing pretty well right now. I think they call it moderate growth, doing well.
PAULSON: Right.
GERSH: And yet though we are projected to have two million homeowners facing foreclosure over the next two years. We haven't seen anything like that in almost two decades. How does the economy weather that?
PAULSON: Let's, again, let's just step back and look at this. Now there have been estimates that -- that two million mortgages will reset. That doesn't mean that there is going to be two million workouts or two million foreclosures, OK. So there is -- this is an issue we're taking seriously. And we're working very hard to do everything we can to help those homeowners that are going to be facing difficulties and have the capabilities to own their home, to continue to own their home. We're not working to keep speculators in the home, people where it is not their primary residence.
GERSH: But what sustains the economy and the economic growth that you see, we see people, residential construction going down, people not taking money out of their homes because that propped up the economy for years.
PAULSON: Well, first of all, outside of the U.S., this is the strongest economy that many of us have seen in our business lifetime. And right now we're benefiting from that in the U.S. For a long time, we were the engine of growth for the world. Now experts are growing much more quickly than imports. That is helping us. We have an economy that is creating jobs every month, raising the standard of living.
GERSH: Let me ask you about what some traders and analysts are telling me is going on in the markets right now. There's something called the London interbank offer rate, libor which they say has spiked up recently out of historical norms.
PAULSON: Right.
GERSH: And they take it as a signal that, of stress in the markets, that banks don't want to lend to each other and that it is a lack of confidence in the markets, especially among the big banks. Do you read anything into that?
PAULSON: Well, I would say that's one thing you can read into it. I would say that there are many of other signs of stresses and strains in the market. I think what is going on here is a reassessment of risk. We had had benign economic conditions for some time. It is not at all unusual in our economy for there to be periods of stress and strain.
GERSH: Have investors learned their lesson? Are they expecting the Fed to bail them out (INAUDIBLE) ?
PAULSON: Well, I would say, you know what, investors may learn their lesson. And then they've got a relatively short memory. And so again, it seems, if you look at economic history, they learn their lesson every seven, eight, 10 years or what have you. But again, remember, that we have the most innovative capital markets in the world. There has been real innovation. There's been innovation in terms of securitization of credit. Now that, Darren, has made credit accessible to many Americans where it wouldn't have been accessible. It's made it accessible at lower rates of - - at lower rates of interest. That has had big advantages and it poses challenges.
GERSH: Well, one of those challenges is that people tell me that the risk has sort of been sliced and diced. It's been spread all over is the good you news. But the bad news is it's been spread all over and nobody knows where it is, how much it is and it worries everybody. Is there a regulatory change that needs to be done?
PAULSON: Let me say first of all, you described that very well, OK. It's been spread all over and the challenges coming from that are twofold. First of all, the complexity and second of all we're much more integrated into the global markets than we were eight or 10 years ago. And so that means it will take longer to work -- work this through the system.
GERSH: Secretary Paulson, thank you for your time.
PAULSON: Thank you.
