Tuesday, January 27, 2009

Blast from the Past

Here’s an interesting little transcript I discovered in the vault earlier this morning. It’s a transcript of a Fed debate I had on Nightly Business Report with former Goldman Sachs chief economist Bill Dudley, back in 2000, when I was chief economist at ING Barings. As you may have heard, Mr. Dudley was just selected to succeed Tim Geithner as head of the NY Fed.

Take a look at the exchange. Looks like I nailed all the key points. The Phillips Curve is bunk. The Fed should not have raised rates. They tightened the screws too much, and that ultimately laid the foundation for the ensuing recession and stock market meltdown.

Here’s the money quote:
I think the 50 basis point hike last month was a very radical and ill advised move. I don't think inflation is caused by too many people working or prospering or producing or by economic growth. I think inflation is essentially a monetary problem created by the creation of too much money or excess liquidity by the Fed.

Still sounds pretty good to me.

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Nightly Business Report – June 27, 2000

SUSIE GHARIB: Policymakers at the Fed began their two day meeting today to decide what to do next about interest rates. They've raised rates six times in the past 12 months. Most economists don't expect a rate hike tomorrow, but expect the Fed to issue another stern warning on inflation risks. The final decision will be made public at 2:15 Eastern Time tomorrow afternoon. So, is the Fed making the right moves for the economy? Joining me live in New York to debate this, two top wall Street economists, Bill Dudley, Chief Economist at Goldman Sachs and Larry Kudlow, Chief Economist at ING Barings. And welcome to both you of. Bill, let me start with you. You think that the Fed's interest rate policy has been right on track. Tell us why.

WILLIAM DUDLEY, CHIEF U.S. ECONOMIST, GOLDMAN SACHS: Well, I think the economy has grown above trend for quite some time. You can see that in the declines in the unemployment rate. That's putting pressure on the labor markets. We're starting to see an up trend in wage costs and I think probably the very best news on inflation is behind us now. So the Fed's, the Fed basically has to plan for the worst, hope for the best, and I think that's what they're doing.

GHARIB: All right now, Larry, what Bill is saying is the majority of you, you are in the minority who are saying that the Fed doesn't need to raise interest rates. Tell us your case.

LAWRENCE KUDLOW, CHIEF ECONOMIST, ING BARINGS: No, I think the 50 basis point hike last month was a very radical and ill-advised move. I don't think inflation is caused by too many people working or prospering or producing or by economic growth. I think inflation is essentially a monetary problem created by the creation of too much money or excess liquidity by the Fed. And I think a careful glance at some of the leading market price movements, for example, gold, for example, commodities, spot commodities excluding the temporary oil shock, they're both at 20 year lows, I see long-term interest rates coming down. I see spreads in the bond market beginning to narrow. These are disinflationary signs.

GHARIB: So what do you think the Fed should be doing?

KUDLOW: Oh, I think the Fed should end the tightening cycle. I think if they follow through with this Phillips curve idea that unemployment is too low, if they follow Larry Meyer's view that we need a five percent unemployment rate, that will throw two million people out of work. And I think that would be just a dreadful policy response. That punishment simply does not fit the non-inflation, non-crime.

GHARIB: Bill, if the Fed listened to Larry what would be the outcome?

DUDLEY: Well, I think the reality is nobody knows for sure because we have a lot of uncertainties in this economy. We don't know what sustainable productivity growth is. We don't really know what unemployment rate we can operate at safely. I think what Chairman Greenspan, though, has concluded is that if it really is a new economy and we really have a higher productivity growth, neutral monetary policy probably means higher real interest rates than before. If you've got all these great investment projects out there that people can undertake, you need a little bit higher interest rates to allocate that supply of credit among all
those projects. I think that's really why Chairman Greenspan, who I think is very dovish and would agree with Larry in a large number of respects, thought some modest amount of tightening was warranted.

GHARIB: I was going to ask you, do you think that the Fed should be cutting interest rates?

DUDLEY: I think the Fed is going to be cutting interest rates later this year or early next year. I think the economy is going to be slowing quite apart from the Fed. There are two issues here people have forgotten about. Number one, consumers spent heavily in the run up to Y2K last year. It turned out to be a nonevent. But that consumption was borrowed from this year and you're going to see downturn now. Number two, there are some pretty painful gas pump price increases going on and my own view is the federal government should be using the surplus to cut gasoline taxes but they probably won't. That's going to cause a slowdown right there. On top of that, the Fed has layered on a liquidity squeeze and they've raised the cost of capital. So I think that the damage has already been done. Don't do any more damage. But the key point is this, neither the inflation indexes themselves, excluding oil-Greenspan's favorite is the consumption deflator, 1.6 percent last 12 months-not the gold price, not commodity prices, not interest rates, I think the proof has to be on my friends on the Philip's curve, and they rule economic growth is bad side. Where exactly is this inflation?

GHARIB: OK, let me ask both of you this because we have very little time left. If the market rallies this summer based on whatever the Fed does, do you think that would be good for the economy or would that worry you? Real quickly, a quick answer.

KUDLOW: Oh, it would be good for the economy for sure. I think one reason why monetary policy has not restrained the economy up to now is because the markets have so much confidence in Chairman Greenspan. So you haven't had the backup in bond yields or the sell-off in the stock market that you typically get. If the markets rally, that will make the economy stronger.

GHARIB: Real quickly, in a word or two. We're running out of time.

DUDLEY: Listen, a good stock market creates wealth. That creates investment. That creates productivity and jobs. The Fed should keep its nose out of the stock market. Take a rest this summer, Fed.

GHARIB: I'm glad the two of you agree on something here. Thank you for very much for joining us this evening. And we've been speaking with Bill Dudley of Goldman Sachs and Larry Kudlow of ING Barings.