Here's a timely interview with McTeer. Warning: Long, but worth it...indicates fairly strongly no rate cut this week- barring emergency..
--------------------------------------------------------------------------------
From the Special Series Inside the Fed:
Part 1
In the first part of our special series, Susie Gharib goes one-on-one with Dallas Federal Reserve Bank President, Robert McTeer.
Transcript: February 26, 2001
SUSIE GHARIB, CO-ANCHOR, NIGHTLY BUSINESS REPORT: Why don't we start off by you telling me where is the economy headed?
ROBERT MCTEER, PRESIDENT, FEDERAL RESERVE BANK OF DALLAS: Well, obviously I don't know where the economy is headed. I hope we'll have a touch and go -- if you want to go with the soft landing, hard landing type analogies. I hope that we will either barely touch ground and head back up or avoid touching ground.
GHARIB: Let me ask you this way. How bad is this slowdown going to get? Is this just a matter of an inventory correction, or is this something more serious?
MCTEER: Well, it's hard to say. It's not just an inventory correction. I think the major thing that's happened is sort of a boom/bust cycle in investment. Investment has been growing at double-digits for so long, it just got to be unsustainable, and it dropped off fairly rapidly. I think the… all the information technology, the bar codes and so forth enable producers to react very quickly to rising inventories; and I think they'll have inventories under pretty good control. I think the question is whether consumer spending (which takes up about two-thirds of the economy) can be sustained -- even while consumer confidence is being shaken by what's going on in the stock market and in the high-tech sector right now.
GHARIB: There has been so much conflicting economic data. It's a confusing time for people to interpret what's going on. What is your sense of how bad off is the economy?
MCTEER: Well, in the fourth quarter, the first number that came out is 1.4. I wouldn't be surprised if that weren't revised down just a little bit in the revisions to come. The Chairman indicated earlier this year that it seemed to be somewhere around…around zero. But we haven't had a negative quarter yet, and we're not through with the first quarter. January seemed to have a little pick up in it. December was… appeared to be the worst month, and January was encouraging. But at least in terms of stock market valuations, we've lost pretty much in February what we gained in January.
GHARIB: But in your region, in your district, you have a lot of high-tech companies. You have Dell down there; you have Compaq; you have other high-tech companies; you have the oil industry. As you look at your region.. as you look at the rest of the country, what is your assessment of the economy? How much trouble is it really in? I mean, people really want to know that.
MCTEER: Well, in my region, for a long time, we had two good things going for the region. One was the high oil and gas crisis, which were bad for the rest of the country, and the other was rapid growth in high-tech production. That's been our engine of growth, which has sputtered just a little bit lately. But we still have two advantages in this area. One is oil and gas, and the other is that our international trade is concentrated largely with Mexico, which has been doing very well. As far as the country as a whole, a part of our economy is in trouble. It's shrinking. And that's the goods producing part, the investment part. But so far, the broader services and consumption have been holding up relatively well. We just need not to let the hype pendulum swing too far over into negative territory. We need to sort of be patient and be calm and keep spending.
GHARIB: Well, Mr. McTeer, some economists and business leaders say that we're already in a recession. Do you think we're in a recession?
MCTEER: Well, in a technical sense, we're not because we haven't had a negative quarter yet. And I think the fourth quarter will hold up barely in positive territory. It's possible that the first quarter will come in negative. But the Fed has already put 100 basis points of stimulus in the economy in January, and that seemed to help a little bit. And I think we'll do more if it appears that more is needed.
GHARIB: What are the chances that this economy could slip into a recession?
MCTEER: Oh, I don't know. It's certainly above zero. But I don't think it's above 50 percent yet. I think that's yet to be determined. And, money supply is growing handily... interest rates have come down. Actually, market interest rates came down ahead of Fed easing. Mortgage rates have come way down and encouraged refinancing. So, there are sectors of the economy that would normally be leading us down in a recession that are holding up fairly well. The high-tech sector, though, is undergoing an adjustment.
GHARIB: There are some people who are counting on a V-shaped recovery (sharp slowdown and a sharp recovery) by the second half of the year. Do you think that's too optimistic?
MCTEER: Well, that's what I'm hoping for too; and I'm not sure whether it's too optimistic. I will say that the information technology, bar codes and so forth that enabled producers to react so quickly to softening sales also can work on the upside. We have almost real-time monitoring of inventories, and I think the same technologies that got them started early can get them finished quickly as well. So, I think that's a real possibility.
GHARIB: But as you look at this slow down that we're in right now, do you think that we're going to have a sharp recovery in the second half? What are the chances of that happening?
MCTEER: Well, there's no way I can put probabilities on what the recovery is going to be like. Right now, the question is: Are we…have we hit bottom yet? And I think that's questionable enough right there.
GHARIB: What indicators are you watching that will tell you that we're turning or going further to bottom?
MCTEER: Well, basically it's total spending that you hope will be sustained. And the January retail sales numbers were encouraging. The January Leading Economic Indicator Composite was encouraging. So it's a sign of spending. The unemployment rate, so far, has held up remarkably well. It's only at 4.2 percent, and new claims have not shot up all that much either. So, there are good signs of sustainability. The problem is that consumer confidence is really taking a beating by watching financial news all the time and watching the earnings projections being missed and lowered and watching the stock market take a beating as a result. The stock market is much more important now in determining consumer attitudes than it used to be.
GHARIB: Look, don't blame the financial shows. [LAUGHS] We're only reporting what's going on. But let me get back to this consumer thing. What about consumer confidence statistics? How closely are you watching those?
MCTEER: Well, more closely now than I would normally do. They've been at record-high levels so long that you tend to not pay much attention to them, and they've dropped fairly sharply in the last couple of months. But if you look at a long-term graph of consumer confidence, it's still relatively high in historical terms. The problem is the rapid change in it. We hope that that will stabilize before consumers start acting on their greater pessimism about the future.
GHARIB: Let's say that tomorrow's report on consumer confidence comes out weaker than even the January reading. How concerned would you be?
MCTEER: Well, I'd rather be stronger than weaker, but I don't know what to say. I would be concerned, but I think that's almost to be expected the way things have been going right now. The question is whether consumers actually pull back on their spending. While they may individually have an incentive to do that.. it may be the right thing to do. If they all do it together it together, it wouldn't be good for the economy.
GHARIB: There's been a lot of focus on consumer spending. You've been talking a lot about it. We also had today: Home sales are down sharply. If tomorrow's reading on consumer confidence comes in weak, could that be reason for the Federal Reserve to take action on cutting interest rates before it's March 20th meeting?
MCTEER: Oh, I wouldn't think that one number -- or even a couple of numbers -- would be sufficient to do that. But all taken together, I don't know. Obviously, if the need is obvious and great, that's a real possibility. But if it's not so obvious and not so overwhelming, I think there is a preference to make monetary policy at regularly scheduled meetings.
GHARIB: Well, there's been considerable speculation that if tomorrow's consumer confidence report comes in weaker than January, that the Federal Reserve policymakers will meet to cut interest rates ahead of that March 20th meeting. Now, have you been contacted about a possible conference call or a meeting with your colleagues at the Fed?
MCTEER: No. But I couldn't… I wouldn't tell you if I had, but I don't know where people get these ideas. It may happen. It may not happen. I don't have any idea whether it's going to happen. So I don't see how anybody else could know either.
GHARIB: Let's talk a little bit about stock market performance because that is a factor in confidence. Do you think the stock market has to recover in order for consumer confidence to recover?
MCTEER: Well, I think at least it needs to stop declining. Valuations are still high. So, there's still a potential for further declines, but you know, with half the people owing equities in the country, that's a much more important factor in consumer confidence than it used to be. The stock market is still high, relative to, you know, a little over a year ago, but it's certainly not anywhere near where it was a year ago.
GHARIB: Are you concerned about the negative wealth effect coming from this declining stock market and it's impact on the economy.
MCTEER: Yes. If it caused people to spend 100 percent of their disposable income on the way up, it certainly can have a dampening effect as it comes down so rapidly. So, I am concerned about that.
GHARIB: So, let me ask you this way. The fact that the NASDAQ has declined so dramatically and that so many technology companies are reporting a weakness in demand, do you think that this is a signal to the Federal Reserve that maybe this outlook for a recovery in the second half of the year is a little too optimistic? Is this a signal to you from what's going on in the stock market?
MCTEER: Not so much. The stock market is important to us to the extent that it affects the economy. To the extent that it's just a stock market phenomenon, I mean we're concerned, but we can't base monetary policy on the stock market. I don't think there's a Greenspan put, for example.
GHARIB: Usually when the Federal Reserve cuts interest rates, that sets off stock market rallies. Consumers feel a lot more comfortable about spending money. We don't see that happening so far this year, despite the dramatic interest rate cuts. What's going on? Why isn't that happening?
MCTEER: Well, I do think the January 3rd cut, because it was a surprise (it came between meetings and was larger than expected), did have a fairly significant impact on financial markets. The stock market reacted favorably for a while--
GHARIB: I know, but where the market is right now is pretty much where it was at the beginning of January -- even below that.
MCTEER: Right. I think that some of the risk premiums though in the credit markets continue to be a little bit better than they were before that. I think there's still some residual benefit from that move, and then, with the one at the end of January added to it.
GHARIB: What I'm getting at is that there should be much more of a feeling of calm and optimism -- given the Federal Reserve interest rate action. Do you think that the Federal Reserve maybe hasn't done enough to restore consumer confidence?
MCTEER: Well, perhaps there will be more to be done.
GHARIB: When?
MCTEER: Oh, I don't know. We'll have to get together to discuss it.
GHARIB: Have you been surprised by the abrupt slowdown in the economy? Here we have this economy that was like in a Nirvana state; and then, it hit the wall. Have you been surprised by that?
MCTEER: Yes, that did surprise me. I was making fairly optimistic speeches in September and early October and had no idea that the economy would do what it did -- mainly at the end of the year, starting in November but more so in December. It was very surprising.
GHARIB: So, what do you think is responsible for this abrupt slow down?
MCTEER: Well, what I'm reminded of are the old Roadrunner cartoons, when the Roadrunner would always stop right before the edge of the cliff, but Wile E. Coyote would overrun it. And he'd keep running until he looked down. And when he looked down, he fell. I think, probably what happened (at least in tech stocks) is somebody looked down and suddenly realized there was more foam than beer, as we might say in Texas. And to some extent, maybe that's what happened with investment, which was so strong for so many years. I think people realized it maybe getting a little bit ahead of itself. And so, everybody started reassessing at the same time.
GHARIB: So, who's the Roadrunner in your analogy. Is this the consumer? Is it businesses? Is it Federal Reserve policymakers?
MCTEER: Oh, I don't know. I think Wile E. Coyote are the investors. They're the ones that look down.
GHARIB: All right. Do you think that the Federal Reserve overdid it? Do you think that it tightened too much?
MCTEER: That's hard to say. The cumulative tightening was only 1 3/4 percent -- that's compared to 3 percentage points back in 1994. The last tightening was 50 basis points, but that was as long ago as May of 2000. I think the high energy prices added to the drag on the economy from the tightening. And then, beginning in the spring, falling stock market prices added to the drag on the economy. And frankly, I think in November and December, the political uncertainties played a role. So, adding all those things together, it probably was a little much, but monetary policy alone, it'd be hard to say. You could argue it either way.
GHARIB: I want to move and talk to you a little bit about inflation. What about the new worries about inflation? The latest reports on the Consumer Price Index and the Producer Price Index showed an uptick in inflation. How concerned should we be?
MCTEER: Well, those were bad numbers, and you never like to see numbers like that. And under normal circumstances, I would be very concerned about them. But that is looking back right now, and I think, right now, the greater concern is for economic weakness rather than inflation -- despite those inflation numbers. So, I personally would not let those inflation numbers keep me from doing what needed to be done on the other side.
GHARIB: So, the inflation numbers haven't any way changed your mind about your assessment on the economy?
MCTEER: I still feel that the greater danger (and that was the Committee's official position at it's last meeting) the greater danger is still toward economic weakness -- despite those numbers. I regret those numbers. They're bad numbers. But I don't think they should take priority right now.
GHARIB: When you talk about your concern about the weakness of the economy. What do you think about President Bush's tax cut proposal as a way to give a boost to the economy?
MCTEER: Well, I don't want to comment on a particular tax cut proposal, but I think the surpluses have gotten so large out in the future that there is room to put a tax cut in as well as pay down the debt. So, some sort of tax cut, I think, is probably a good thing to do; and hopefully, it will focus on marginal tax rates in a way that would give us some supply side impetus to the economy.
GHARIB: So, if the Bush tax cut proposal does go through, are you saying that it would impact monetary policy?
MCTEER: No. I mean, it might or it might not. You base monetary policy on what you see the economy doing, and if fiscal policy impacts the economy, then you're reacting to the economy not to the fiscal policy. I don't think that there's any kind of deal to be made or any expectation of a certain monetary policy to go with a certain fiscal policy.
GHARIB: But if we get a tax cut, does that mean that the Federal Reserve will have to compensate by not cutting interest rates as much?
MCTEER: No, it doesn't mean that at all.
GHARIB: So, can we have both then? We can have tax cuts and interest rates cut?
MCTEER: Sure.
GHARIB: Can you just elaborate on that a little bit?
MCTEER: Well, I mean the economy is weak right now, and fiscal policy is not very well suited to counter the weakness in the economy. It's not a very flexible anticyclical tool, but low marginal tax rates (certainly, lower than we have right now) are helpful to the economy over the long run. It lowers the cost of capital, makes investment more productive, gives incentives. So lower taxes, I think, are just better for the economy overall. Monetary policy, on the other hand, is more flexible. It can be implemented more quickly, and I think it's better suited as a stabilization device. So, the fact that you're getting better fiscal policy shouldn't cause you to have worse monetary policy.
GHARIB: Mr. McTeer, if you were Chairman of the Federal Reserve right now, and given your views about the new economy, how would you be directing monetary policy right now?
MCTEER: Oh, I think the present Chairman is doing a fine job, and I wouldn't second-guess him at all.
GHARIB: But just humor me here a little bit. If you were in that position and Mr. Greenspan were not there…you have very strong views about the new economy and the role of technology and productivity and all of that, if you were in a position to really influence and direct monetary policy, how would you use your influence with your colleagues on the board, given your views about all of this?
MCTEER: The new economy… I'm still a new paradigm optimist. I think, right now, we gotta get through this period; but all of the recipes for the new economy are still around. All of the new technology is still here. We're in a knowledge economy, and knowledge doesn't disappear. We're in an information economy, and information doesn't disappear. We're on the threshold of a wonderful new world in biotech. The human genome project is opening up wondrous things; and I think in the long run, the new economy --with its faster productivity growth and higher speed limits -- means that monetary policy can be more accommodative over time than perhaps it could be in the last many years. But right now, all this is sort of out in the future, and we want to get back on track. We want to restore our growth rate up to what I consider it's higher potential, which is at least 4 percent growth.
GHARIB: How long is it going to take for us to get back to that kind of growth?
MCTEER: Well, I have no idea. But it's possible that it won't take long if we will all just be calm and go on about our business and not overreact.
GHARIB: Mr. McTeer, thank you so much for talking to Nightly Business Report. We really appreciate it.
MCTEER: Thank you, Susie. |
