McTeer's incredible comments today need to be recorded for posterity. Bookmark this post for review in 12 months time. Either I want some of what he's smoking, or the Fed is DEEPLY worried about a stock market crash on the back of oil prices.
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September 11, 2000
Fed's McTeer:Economists Not Optimistic
Enough On Growth
Dow Jones Newswires
CHICAGO -- A Federal Reserve policymaker said Monday the U.S.
central bank should stop trying to slow economic growth to fight
inflationary pressures, arguing the economy's capacity for
non-inflationary growth may be much higher than most policymakers
think it is.
"The most important thing in monetary policy is to avoid making
monetary policy based on GDP growth," Robert McTeer, president of
the Federal Reserve Bank of Dallas, told a gathering of economists
here. "We don't know what the speed limit is." McTeer is a member of
the Fed's policymaking Federal Open Market Committee, although he is
not a voting member this year.
The Fed has raised interest rates six times over the last 15 months,
raising the key federal funds rate to a nine-and-a-half-year high of
6.5% specifically to slow economic growth to a rate it considers safe.
Since May, however, the Fed has avoided raising rates, acknowedging
that the rate it considers safe has increased.
McTeer, speaking at the annual conference of the National Association
For Business Economics, on Monday offered the most optimistic
assessment of any Fed policymaker about the maximum rate the
economy can grow without sparking inflation. He suggested it may be
as high as 6%, well above the range of 3.5% to 4% estimated by most
Fed policymakers.
McTeer said estimates of the maximum sustainable growth rate have
traditionally been made by adding increases in work hours to increases
in productivity. Until the 1970s, he said, the sustainable rate was
estimated at 2.5%, because productivity gains averaged 1.5% and work
hours grew by 1%. But productivity gains have since accelerated
substantially.
In the year through June, for example, U.S. non-farm business
productivity grew 5.2%, the fastest rate since 1983. If that rate is used
to estimate the sustainable rate of growth, the economy could grow as
much as 6% without sparking inflation, he suggested. "Now let's see,
5% plus 1%," he said.
McTeer, who last year dissented against Fed decisions to raise
interest rates, said productivity gains are "almost certain" to be "greater
than currently measured." Still, he said productivity growth can't
accelerate indefinitely and Fed policymakers must be appropriately
cautious.
"I don't suggest that we base monetary policy on productivity. I suggest
that we base it on inflation and inflation indicators," McTeer said. "So I
don't think we'd be thrown off with the productivity statistics.
Fed policymakers acknowledge that the central bank no longer is trying
to slow economic growth, largely because productivity data since May
have mostly dispelled their fears of near-term inflation. For the next few
months, they say, they will pay much closer attention to actual evidence
of inflation in deciding whether further interest-rate increases are
warranted.
Given that inflationary pressures remain mild, Wall Street and most
economists now expect the Fed not to raise rates again for the
foreseeable future. "They think the Fed's finished tightening," Richard
Berner, chief U.S. economist of Morgan Stanley Dean Witter & Co. said
Monday, announcing the results of a survey of NABE forecasters.
McTeer said he agreed with association's forecast that inflation should
moderate next year.
Most of the recent increase in inflation, McTeer said, is the result of
higher energy prices, including oil prices, which hit a 10-year high last
week. "It's possible oil prices are near their peak," he said.
Still, McTeer took economic forecasters to task for consistently being
too gloomy about the economic outlook. "We all know this economy has
not been kind to the pessimists," he said. "Frequently the optimists
have not been optimistic enough."
He said he could see nothing in the "economic realm" that would pose a
risk to U.S. prosperity. The ballooning current-account deficit, he said,
isn't a cause for worry because it "reflects economic strength rather
than weakness": the U.S. economy is importing more than it exports
because it is growing much faster than foreign economies. Moreover,
the U.S. stock market isn't quite the danger that many policymakers
thought it was earlier this year.
"If it was a bubble, it is much less of a bubble that it was at the first of
the year," McTeer said.
Instead, he said, the biggest threat to long-term economic prosperity is
educational. "We aren't producing nearly enough technically skilled
workers" to meet the needs of the economy, he said. He urged
Congress to approve more temporary work visas for high-skilled foreign
workers. In addition, he said, "I think we would benefit from immigration
at the lower end."
McTeer said a tight labor market promotes increased productivity,
which boosts the economy's capacity for non-inflationary growth.
Recently, he said, U.S. job growth has slowed, indicating an overall
economic slowdown may be underway. But the slowdown will be gentle:
"I don't expect a recession at all," he said.
-By Joseph Rebello; 202-862-9279; e-mail:
joseph.rebello@dowjones.com |
