Michael Moran of Daiwa Securities Offers His Outlook For Oil
Wednesday, September 12, 2007SUZANNE PRATT: Joining me now to talk about the potential effects of those higher oil prices is Michael Moran, chief economist at Daiwa Securities. Michael, welcome to NIGHTLY BUSINESS REPORT.
MICHAEL MORAN, CHIEF ECONOMIST, DAIWA SECURITIES: Thank you, Suzanne, good to be here.
PRATT: It's not just oil, but food-related commodity prices are moving higher too. Do you think that is going to alter the Fed's decision at all next week?
MORAN: I think it will have some influence on the Fed's decision, but the Fed is still going to cut interest rates. Right now we have I think a favorable inflation outlook. The two most important influences on inflation are the public's expectations of inflation and the level of resource utilization or the strength of the economy and right now neither one of those are threatening. Expectations of inflation are low and the economy is starting to slow down. That will create some slack in the economy and it's going to help keep inflation in check. I think what's going on with oil and some other commodity prices will probably lead the Fed just to cut 25 basis points or a quarter percentage point rather than half a percentage point but the Fed I think is going to go ahead and reduce interest rates.
PRATT: So you don't think the Fed is worried that those higher oil prices and commodity prices are being passed or at least going to be passed through to the consumer any time in the near future?
MORAN: You know, I don't think they would be deeply worried about that. Because right now corporations have wide profit margins. They could absorb that cost increase if they have to and they probably will do that in a sluggish or slow economic environment. I don't think they'd want to risk losing market share or cutting their business. I think they will eat the increase in energy costs.
PRATT: So right now you would say that the Fed is more concerned about the risk of recession than it is about inflation.
MORAN: They told us that in mid August. They put out a new statement for the public and they said exactly that, that they're now very much concerned about downside risk to the economy. They're still looking at inflation keeping their eye on it, but the growth rate is the primary concern right now.
PRATT: What about the credit crunch? How worried do you think the Fed is right now about the credit crunch?
MORAN: I think that's a major issue and I think that's an important reason why the Fed is going to go ahead and cut interest rates when they meet next week. It has the potential to slow the economy down noticeably and I think they would like to get a little bit of a leg up or a head start on any constraining influence the credit crunch is going to have.
PRATT: Let's talk about the dollar. The dollar was also making headlines today. IT set a new record low against the euro. Isn't a soft dollar a good thing potentially for the U.S. economy?
MORAN: It is I think a good thing when you're in a slow economic environment, because it's going to slow down the growth rate of imports. Our domestic producers are getting more business than they would have otherwise. They'll be taking market share away from foreign producers and it's going to help our exports. So from a growth perspective, a softer dollar is a good thing. The negative side of it is that it does have some price consequences, but I don't think that's a deep negative now, because of what we just said with the slower economic environment inflation is not a threat. So I think the softer dollar is going to help maintain growth in the economy. I think we're going to avoid a recession and part of the reason why is because the dollar has been soft and our trade sector has been starting to do better. That's going to give us some cushion and help the economy keep going.
PRATT: I want to get one more question about the housing market. You at least a month ago I remember said that if you didn't think or you at least thought that we were seeing the worst of the downturn in housing, you are not so sure about that any more. You think that there could be more serious problems ahead for the housing market.
MORAN: I think we're going to take another leg down in the housing market. I was too optimistic a couple of months ago. A couple of things have happened. Number one because of the credit crunch, I think there's tighter lending standards in place now than there was previously. In addition, there's been a great deal of talk in the media about possibly falling home prices and I think that is going to make many buyers reluctant to make a commitment. They're probably going to the pull to the sidelines for a time. So I think we're going to unfortunately see another leg down in home sales and in home construction as well.
PRATT: Let's leave it there. Thank you for joining us tonight, Mike.
MORAN: My pleasure.
PRATT: My guest, Michael Moran of Daiwa Securities.
