Did the Fed Move Quick Enough to Aid Economy?
DEBORAH MARCHINI, CNN ANCHOR: How is the economy doing? That's the question on everybody's mind this morning, with the government set to release first quarter economic growth figures. Joining me this morning to take an assessment of policy and policymaker's impact on the economy is Greg Valliere, Charles Schwab Washington Research Group and David Jones, Aubrey G. Lanston. Nice to have you both with us.</s>GREG VALLIERE, SCHWAB WASHINGTON RESEARCH GROUP: Great to see you.</s>MARCHINI: And I'm going to start by asking just a very simple question. We're expected to see very slow economic growth. What are the odds it will turn into a recession?</s>DAVID JONES, AUBREY G. LANSTON: I think very low, Deborah. The best bet I would have is that, you know, we're just going to skirt it. We're going to be growing, maybe, in the first three quarters of the year around 1 percent. Perhaps a little bit below 1 percent in the first quarter, a little bit above in the second quarter if auto producers stick with their increased production schedules, at least. Third quarter will still be weak, less than 2 percent. But, you know, maybe by the fourth quarter we'll see the delayed affects of the Fed rate cuts in terms of a little bit of growth -- and Greg is the expert on this, but maybe, just maybe, Congress will finally get around to passing a tax cut by then.</s>MARCHINI: What do you think Greg? How close did we get to recession?</s>VALLIERE: We got close, but I think we dodged the bullet. The consumer didn't totally hibernate. Inventories have been worked off and, as David said, I think by the fourth quarter we could be back on our feet. I think all the stars will be in alignment, including the impact of the tax cut in the fourth quarter.</s>MARCHINI: The consumer didn't hibernate yet, but if you look at the jobless figures, which you're starting to see -- initial jobless claims over 400,000, which is consistent with the rising unemployment rate, help wanted advertising down, people seem to be staying unemployed longer. This is where it really starts to hit home with consumer behavior -- right?</s>JONES: Well the story, Deborah, is that in a very unusual way we're in a window here. You can say from maybe April to June, the issue is whether the business sector, inventory correction and the capital spending boom-bust can work their way through before the consumer finally realizes that maybe their job is in jeopardy. Greenspan has talked about this earlier in the year. He said the question is, can we get an adjustment pretty well finished before consumer confidence crumbles, and I will make a small bet with you. You know, I don't bet much money, Deborah, but the bet I would make is that no one, either inside the Fed or outside, really knows exactly where we're going to be six to 12 months from now, except to say this three-month period is going to be critical in determining where we are. The risks are still very much on the downside, but that business sector adjustment has to take place faster because of the information technology revolution and other things; and we have to keep that consumer from giving up or we really will go into recession.</s>MARCHINI: Greg, by historical standards, the Fed moved quickly to cut interest rates here -- 2 percentage points from January through today. But was it too little, and did it come too late? Did the Fed blow this call?</s>VALLIERE: Well, I'm reluctant to debate any one of David's stature about the Fed. But I do think there are a couple of things that the Fed has done in the last few months that warrant some criticism. First of all, they really got blind-sided late last year; in November, in particular. I was out seeing some of the country's biggest institutional investors, mostly in Boston, who were all telling us right after Thanksgiving that the economy hit a brick wall. The "Beige Book" came out in early December, detailing economic conditions from the Fed, didn't indicate any problem. I think the Fed had a disastrous meeting on December 19 when they didn't cut rates. So, really you had the country's big financial institutions ahead by four, six, eight weeks ahead of the Fed in seeing where the economy was going.</s>MARCHINI: David?</s>JONES: Well, I have to agree that the Fed was behind the curve. Actually, I would say they've been behind the curve in the first three rate cuts this year. But the fourth one, I have to give Chairman Greenspan and his fellow policymakers a lot of credit for -- the mid- April rate cut. You can actually look at how the financial markets respond earlier -- in those earlier cuts, perhaps, coming too late. Perhaps not being as aggressive as they should be. What happened? Stocks went down. Bond prices went up and yields down because investors continued to expect the economy would weaken with the Fed behind the curve. But Greenspan did get it right. A pleasant surprise in the fourth cut. Stock rallied, the yield curve steepened as bond investors begin to think maybe recovery is on the way, perhaps even a wage cost price acceleration could happen at some point.</s>MARCHINI: Very quick question to both of you. David, then Greg. Do we get a quarter-point cut at the main meeting?</s>JONES: Yes, and maybe another one in June.</s>VALLIERE: I think we've ended the 50-basis point stretch; now we're going to get smaller cuts, and maybe a couple more.</s>MARCHINI: All right, sit tight both of you, and I hope our audience will as well because we'll be hearing more from these gentlemen in a moment on AHEAD OF THE CURVE. Back in a moment.</s>MARCHINI: Welcome back. I'm talking with political economist Greg Valliere and economist David Jones. And, Greg, I'll start with you. We saw the Federal Reserve fail to act on interest rates, even as the stock market was tumbling. The market started to rise and there the Fed is cutting interest rates at the latest turn. What, if any, role do you think the stock market plays in the Fed's deliberation?</s>VALLIERE: I'd have two issues, Deborah. First of all, is it in the Fed's mandate, in the Fed's charter, to react to the stock market, to have stock investors looking over their shoulder if the market gets too high or too low? No. 2: I see a huge inconsistency here. If the Fed is going to tighten aggressively when the markets are surging, shouldn't they ease aggressively when the markets are tumbling, as they were last fall? It seems inconsistent just to have it one way.</s>MARCHINI: Why bail out the stockholders, David?</s>JONES: Well, it's a love-hate relationship I think the Fed has with respect to the stock market. They love the stock market as an indicator of whether their policy is behind the curve, when stocks were still going down, or even with the curve. They also need the stock market, Deborah. We cannot get a recovery in this economy and the stock prices go up and operate through the wealth effect to increase spending. They hate it because they don't like to be perceived, particularly Chairman Greenspan, as easing policy to bailout stock investors who happen to be imprudent in loading up too much early last year and then losing it all as the year progressed.</s>MARCHINI: David, what do you think the stock market's telling the Fed now?</s>JONES: It's that the Fed is even with the curve -- not ahead of the curve, but at least the Fed, in cutting rates four times, is even with where they should be in terms of easing enough to give us a chance, at least, for some recovery later in the year.</s>MARCHINI: Greg.</s>VALLIERE: Yes, I think that the market has been pleased. But the market has to realize that the Fed is still the only game in town. Tax policy, fiscal policy, is constipated. We're not getting enough out of Washington to stimulate the economy on the tax side. So, sadly, the Fed's the only game in town. And I think, even though we'll come out OK by the fourth quarter, we've gone through a lot of pain in the last 12 months that may have been unnecessary.</s>MARCHINI: And perhaps avoidable. Greg Valliere, Charles Schwab Washington Research Group and David Jones of Aubrey G. Lanston. Thank you both for being here this morning.</s>JONES: Thank you.</s>MARCHINI: Back to Jason at CNN Center for a look at what's coming up. TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com