Here is an interesting interview with Bruce Bartlett, senior fellow at the National Center for Policy Analysis and former deputy assistant secretary of the Treasury under the Reagan and Bush administrations.
He pretty much says what I had suggested:
(Sorry URL to article is no longer valid)
----------------------------------
Soapbox
Why the Fed shouldn't raise rates
Former Treasury official thinks Fed's too aggressive
By Deborah Adamson, CBS MarketWatch
Last Update: 11:14 AM ET May 10, 2000
Commentary
Join the discussion
DALLAS (CBS.MW) -- Fed Chairman Alan Greenspan and his predecessor Paul Volcker are
largely credited with helping to usher in the U.S.'s current era of prosperity.
While they've restored the Fed's reputation as an inflation fighter after the disastrous policies
of the '70s, there are people who think the Fed's current rate-raising stance is too aggressive
because inflation is already under control.
One of these people is Bruce Bartlett, senior fellow at the National
Center for Policy Analysis and former deputy assistant secretary
of the Treasury under the Reagan and Bush administrations.
Bartlett disagrees with the Fed's strategy to raise interest rates now
because he believes the Fed doesn't have good reason to do so.
He thinks that if the Fed goes too far, it could trigger an
unnecessary recession and topple the stock market.
CBS.MarketWatch.com chatted with Bartlett about his take on
Fed tightening and why it may carry more risks than rewards for
the economy.
CBSMW: In several of your writings, you're disagreed with what you see as the
Fed's targeting of a highly valued stock market. Why?
Bartlett: There's something called the "wealth effect." When the stock market goes up,
people have more wealth and they go out and spend. This increases consumption, which
increases pressure on prices.
The rising stock market causes inflation in some sense. I think the data don't necessarily agree
with that. People are inclined to invest more when the stock market goes up than they are to
spend. So I think the Fed is worried about something that doesn't really seem to be the case.
CBSMW: What other factors does the Fed consider?
Bartlett: The thing they are targeting more than anything else is wages. The Fed has a model
of inflation primarily driven by wages. When the unemployment rate goes down, this allows
workers to get higher wages, which leads to higher prices. Some people call this the Phillips
Curve. There have been many studies done on the Phillips Curve that show there really is no
stable relationship between wages and prices.
I think the Fed is underestimating productivity because I think that's critical to one's analysis.
If wages go up 10 percent and productivity goes up 10 percent, then real wages haven't gone
up at all. I think we're seeing more rapid growth both in the economy as a whole and in
productivity, as a consequence of computers -- and I think wages are well-behaved.
I think the Fed (today) is fighting the last war (of inflation in the '70s). They're concerned
about a problem for which there is no evidence.
CBSMW: What about rising oil prices?
Bartlett: A cartel (like OPEC) is contrary to market forces and pushes up price for a time.
But history shows these things don't hold and I think it would be a mistake to base monetary
policy on what some cartel in the Middle East is doing.
You need to look at the underlying trend of inflation and there are a number of
forward-looking indicators, such as the price of gold or commodities in general. If you look at
those prices, there really is no evidence of an upward (inflation) trend.
CBSMW: How is the price of gold an indicator?
Bartlett: History has shown that certain indicators are fairly accurate indicators of future
price trends. Things such as wages and the consumer price index are backward looking --
they're looking at prices that increased in the past and they don't give you information about
what might happen in the future. Gold has historically been an inflation hedge. Investors who
are most concerned about inflation tend to move into things like gold when they fear future
inflation.
There are other indicators, such as the spread between long-term and short-term rates.
Long-term interest rates embody inflationary expectations. If the long-term rate is lower than
the short-term rate, that's a pretty strong indicator that there is no inflation expectation among
those people who make their living trying to profit by figuring these things out.
CBSMW: You have said that by actively intervening to
bring the stock market "bubble" under control, the
Fed took actions that impacted the economy as a
whole, with disastrous consequences. Explain.
Bartlett: If you raise interest rates, you raise interest rates
throughout the entire economy. If they push hard enough, it can
cause a recession. There are no signs of that yet, but the economy
is very elastic like a rubber band. You can pull it for a pretty long
time before it reaches a point at which it snaps and that's my fear.
I hope it doesn't happen. I don't have expectations that it will
happen. But I do believe that if the Fed remains on the course that
it's on, that is what will happen eventually.
CBSMW: You mentioned that a classic case of the Fed
exacerbating, or even causing, a market crash was
1929. Do you see a similar situation happening today?
Bartlett: There is a danger that the Fed might tighten too much
and cause a recession. But I certainly don't think that they will
make the same mistakes as in 1929, which turned a temporary
downturn in the market into something that lasted much longer.
For one thing, I think the Fed is more sophisticated now and
when they make mistakes, they recognize them more quickly and reverse them. I'm not
worried about the Fed creating another Great Depression. But I am worried about them
creating an unnecessary recession when they're concerned about problems that really don't
exist.
CBSMW: Do you think the Fed is acting incorrectly by raising rates now?
Bartlett: Yes. I don't think there's any justification for them to raise rates. But I do agree
with most economists that they will in fact continue to do so for at least the near term. My
hope is that the Fed will look at the significant change in the stock market where we've seen a
big downturn in the Nasdaq and say, "maybe we've dissipated enough wealth in the economy
that this is not going to lead to excessive buying by consumers."
CBSMW: But couldn't one credit the Fed, first under Volcker and then
Greenspan, for ushering in this era of economic expansion?
Bartlett: I don't deny they deserve a great deal of credit. But you have to realize that the
good work that Volcker and Greenspan did was to really compensate for the bad work their
predecessors did. In the '70s, they simply had too much money chasing too few goods.
Volcker and Greenspan did a great deal to restore the credibility of the Fed as an inflation
fighter and they do deserve a lot of credit because inflation is insidious. It's very, very bad for
the economy. (But) there's a time when you should declare victory and not keep fighting the
inflation of the '70s.
CBSMW: You've said that as long as the Fed keeps tightening, investors
haven't seen the bottom of the market. When do you think the Fed will switch
gears?
Bartlett: I wish I knew that. Certainly, if they see meaningful signs of a slowdown in the
economy -- that is, slower GDP growth, higher unemployment and if they see a sustained
bear market, that will certainly have an impact.
Historically, they've tended to react to crises. In the 1980s, they stopped tightening when the
banking sector started to look bad with the collapse of Continental Illinois. More recently,
they stopped tightening two years ago in reaction to the Asian financial crises. It might take
something of that magnitude.
Message 13764521
Scumbria |
