November 16, 1999
MARGARET WARNER: Today's quarter-point interest rate hike is the third
this year. In a statement explaining its decision, the Federal Reserve
said: "Although cost pressures appear generally contained, risks
to sustainable growth persist." The statement added that "expansion
of economic activity continues in excess of the economy's growth potential."
Here to sort through today's decision are Bruce Steinberg, chief economist
with Merrill Lynch; and William Cheney, chief economist with the John
Hancock Mutual Life Insurance Company.
BRUCE STEINBERG, Merrill Lynch: What the Fed is really worried about is that we're on the verge of running out of warm bodies that is, our unemployment rate is so low, that they're worried there's no one left to hire anymore and that this could eventually lead to some inflation pressures down the road. At the same time, they recognize that the performance of our economy has been outstanding, that there is no inflation at present in the economy, and we probably don't have to slow the economy very much to bring it into line with what they probably want to see you doing.
MARGARET WARNER: Mr. Cheney, what would you add to that?
WILLIAM CHENEY, John Hancock: Well, I think what I would like to add is that it's strange that they would choose this particular moment, this particular level of unemployment, let's say, to decide that we're running out of warm bodies.
MARGARET WARNER: But you do agree that that's what they're saying?
WILLIAM CHENEY: I do, indeed, agree that that's what they're say.
MARGARET WARNER: Go ahead. You think it's the wrong conclusion?
WILLIAM CHENEY: I think it's not an entirely unwarranted conclusion. There's no particular basis for choosing this particular moment. Alan Greenspan has probably been one of the greatest benefactors to the American people over the last few years in letting the unemployment rate go down lower than anybody, including myself, thought was reasonable over the last few years. We probably have four or five million more people in jobs because of that. I don't see any specific reason now to pick this moment to try and throttle back.
MARGARET WARNER: Mr. Steinberg, what would you say to that?
BRUCE STEINBERG: Well, the Fed, as a central bank, Alan Greenspan and his colleagues have really been radical in the experiment that they've been willing to run in the U.S.. They have let our economy run full-throttle. And I think they have made the right decisions there. But they are concerned that there are limits that we have to be careful in exceeding. I think in terms of the timing of this move, there was another consideration. The Fed is certainly not going to be able to do anything next month, right ahead with the change at the millennium, the Y2K issue. And they probably felt that if they didn't act now, they were not going to be able to act for at least a couple of months, maybe a little longer than that. They wanted to finish reversing the three easy moves they made in 1997 and 1998 when the world economy was in a big crisis. They've taken back all of these easings. So, this has a certain symmetry to it in terms of where they're headed. I think another consideration for the Fed is that while they're not targeting the stock market and indeed, the stock market reacted quite positively to their move today, they're probably concerned that if they didn't do anything, the market might run away with itself and they would be fearful that that would stimulate the economy some more, which they don't want ton see happen right now.
MARGARET WARNER: Mr. Cheney, how do you explain the market's reaction today -- record highs again on the NASDAQ and the S&P 500, the Dow up 171 points?
WILLIAM CHENEY: By normal standards, it is a little paradoxical. I think it goes along with the sentiment that this is probably the last move for a while. I think it goes along with all the indications that the economy is, in fact, growing at a sustainable pace and the Fed's statement that they're now going to what they call a symmetric directive, which means that other things being equal, they don't see any need to raise rates any more unless there's new evidence.
MARGARET WARNER: So sort of a sigh of relief in a way?
WILLIAM CHENEY: Exactly.
MARGARET WARNER: So what effect - staying with you, Mr. Cheney -- what effect do you think this will have on economic growth? I mean, the Fed did say that they thought economic growth was proceeding at a pace that essentially could not be sustained without inflation. Is this quarter point - maybe taken with the other two -- enough to put a lid on without depressing it too much?
WILLIAM CHENEY: This quarter point by itself is not going to make a big difference. It's going to make a little difference. I mean, that's why they do it. It is going to slow it a little bit more than the accumulated effect of the last couple of tightenings. I guess the big question here is whether the economy needs to slow any more than it is already doing. The Fed stated as a fact that the economy is now growing faster than its potential. And I think that is really the crux of the argument is whether the recent improvements and productivity growth which raise the potential and recent signs of a little bit of a slowdown in a couple of sectors... may add up to... in fact, it's already done what it needs to do -- it's already growing to a slightly slower and now sustainable pace.
MARGARET WARNER: Do I take it then, that you are a proponent of the proposition that we are in a new economy or new economic era in which we can have greater economic growth without inflation?
WILLIAM CHENEY: I think everybody, at this point, would agree that we can have some more economic growth without inflation. And I don't think any reasonable person would argue that we can have unlimited growth. So really, the issue is calibrating your model. And my argument with the Fed at this point would be that the old model has broken down.
MARGARET WARNER: The old model of business cycles and so on.
WILLIAM CHENEY: Well, the old model would say that we get inflation when the unemployment rate drops below 6 percent, which is what most of us believed a few years ago. That's clearly not true. There's some unemployment rate so low that we start to get wage inflation. But we're not there yet as far as one can tell from the evidence of wages.
MARGARET WARNER: Mr. Steinberg, where are you on this question of whether we're in a new economy, and where do you think the Fed is saying it is on that question?
BRUCE STEINBERG: Well, of course, we're in a new economy. Anyone that doesn't believe we are is kind of willfully blind to the amazing things that have happened to the U.S. in the 1990's. The cycle is going to be soon be the longest in history. Growth has been accelerating in the last few years. Inflation has been decelerating in the last few years. Productivity growth which is the source of a higher standard of living has been increasing. So clearly, our economy is functioning much better than it has ever functioned probably in our economic history. But the question for the Fed ultimately is, you know, how much of a good thing can you have? Now, I actually believe that the economy has slowed to what I would estimate its growth potential is at this point. But the Fed is a little more cautious than I am. And it's actually their job to be a little more cautious than I am because they are a central bank. And, for them, the growth potential for the economy is probably a little slower than it's going. But I think what's important to understand it's probably not that much slower. I don't think the Fed wants to see the economy all that much. I think if it just slows a little more, it would be quite satisfied to leave things as they are.
MARGARET WARNER: And you pointed out that it lowered interest rates three times last year by a little bit and then raised them this year a little bit. Has this tweaking done, do you think, what the Fed wanted? In other words, do you think the Fed deserves a lot of credit for our economy's ability to continue to grow without inflation?
BRUCE STEINBERG: The Fed has been an amazing agent of making things really good. When they were easing policy, if they hadn't done that, the world might have found itself in a world depression. Remember, financial markets a year ago, just over a year ago were extremely disrupted. It was the Fed which kind of saved their bacon at that point. The response of the economy was a little more jet-propelled than they expected because things took off quite rapidly. I think that they've done a good enough job that they deserve the benefit of the doubt in terms of what they're doing right now. Now, if they stop where they are right now, the impact on the economy is going to be fairly slight which is why the stock market actually went up today so much -- the thought process being that okay, this is probably it. That's what the market is thinking. But this isn't so bad. The economy will be able to keep on growing fairly strongly. Corporate earnings will keep on going up, and we will have interest rate stability. And I think that's probably right. It's only if they kept on going at this point, that we would have to start worrying what the outcomes would be.
MARGARET WARNER: All right. Well, Bruce Steinberg and William Cheney, thank you both very much.