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Inflation hawk Hoenig weighs deflation threat
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Aldo Svaldi
Even inflation hawks like Thomas Hoenig can have a hard time seeing clearly through the haze now enveloping the U.S. economy.
And the inability to see precisely where we are headed may explain why the stock market has taken a beating in recent weeks.
As a voting member of the Federal Reserve's Open Market Committee, Hoenig has the tough task of trying to predict whether the economy is running too hot or too cold or just right.
Decisions made by the FOMC and its chairman, Alan Greenspan, affect security markets, bank rates and the lives of millions.
Business Week magazine puts Hoenig, who heads the Federal Reserve Bank of Kansas City, into the camp of the inflation hawks.
The hawks are concerned that upward pressure on wages and a growing money supply could trigger higher prices and inflation. They fear rapid growth more than an economic slowdown.
Greenspan so far has resisted calls to hike interest rates, in part because of uncertainty over the effect of the economic crisis that has gripped much of Asia. But last month, the FOMC may have come closer to raising rates than it has in a long time.
Hoenig recently provided insights to Denver journalists on his view of the economy and where he sees it headed.
The nation is enjoying the best economic performance it has had in 25 years, with the fiscal deficit under control and GDP growth in a manageable 2.5 percent to 3.5 percent range, Hoenig said.
Rising labor costs, both in wages and benefits, are a concern to Hoenig. Low unemployment in an economy that is adding jobs faster than people puts upward pressure on wages.
More money in consumer pockets means more spending, which isn't necessarily bad. But without productivity gains, higher wages eventually result in either lower profits or higher prices or both.
Wage gains resulting from productivity gains result in a truly higher standard of living. Gain paid out of inflationary price hikes do not.
After years of resting, inflation is rearing its ugly head in the medical sector again. Consumer confidence remains at high levels, leading to increased spending in everything from automobiles to new homes.
But the economy rarely reveals its course clearly. While inflation shows potential, so does disinflation and even potentially deflation.
Hoenig discounts the threat of deflation with the consumer price index in the 1.7 percent range. Experiencing overall price decreases, as is happening in Japan, would require a seismic event.
"We are quite a ways from deflation," Hoenig said.
But could Hoenig and other inflation hawks be ignoring some major indicators of an economic slowdown?
Commodity prices are at deep lows, as anyone working in the oil patch or corn patch knows. Farmers who make up a large part of the economy in the Kansas City district are suffering from low prices and the loss of government price support.
Reports from California ports tell of big backlogs as cheap imports are finally starting to flood into the country from Asia. Domestic technology companies are buried under unsold inventories.
About 60 percent of the population save so little that they have had no part of the stock market's meteoric rise. There is no wealth effect for them, much less a cushion to face the next downturn.
A significant segment of that non-saving group is so heavily burdened with consumer debt that they will probably topple over at the first winds of recession and job cuts, many losing their over-leveraged homes in the process.
Record personal bankruptcy filings and sky-high consumer confidence dance together as well. Fears of recession and economic slowdown are in an impassioned tango with those of wage-driven inflation.
A stock market downturn, which appears well under way, could shake consumer confidence. Consumer spending, which drives two-thirds of the economy, slows. Unable to sell abroad and facing slackening demand at home, the last thing producers will do is raise prices.
By focusing on inflation, is the Federal Reserve fighting yesterday's battle? The next Federal Open Market Committee meeting is on Aug. 18.
Brokerage goes online
Wells Fargo Securities has rolled out an online brokerage service for its customers called WellsTrade.
Customers of the San Francisco-based bank can check their bank accounts as well as check security quotes and trade stock.
While the $29.95 commission is much higher than that charged by E-Trade, Ameritrade and other online brokers, it remains significantly lower than trading costs at a full-service or even discount brokerage.
Wells Fargo first rolled out online banking in 1989 and was the first large bank to offer retail customers Internet banking. This spring, Well Fargo recently agreed to an acquisition by Norwest Corp., parent of the largest bank in the state.
Short change...
Students of the Denver-based College for Financial Planning can now take their exams at Kinko's nationwide. The computerized "Exam on Demand" can be taken 24 hours a day, seven days a week. Students can take their course work and even exams via the World Wide Web rather than waiting for regularly scheduled exams held across the country ... Bellco First Federal Credit Union opened its eighth branch location at Parker and Orchard roads in south Aurora.
Aldo Svaldi can be reached at 837-3529 or via e-mail at AldoSvaldi@aol.com.
c 1998, The Denver Business Journal
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