Interview: Chief u.s. economist at societe generale
>> today’s better than expected jobs number are fueling speculation the federal reserve will continue to raise interest rates but some investors and economists also say there’s a risk the fed could be raising rates too much as well as too fast. we’re joined by steve gallagher, chief u.s. economist at societe generale, joining us from new york city. what does today’s report tell us about the economy that we did not already know?
>> unfortunately, not much. we have enough information from this morning’s report from the labor department on the job growth in september and also what they see as the impact from katrina itself, if we strip that out. we see job growth in that 175,000 to 200,000 range, just where it was right before hurricane katrina so it doesn’t appear that much has changed in the economy as a result of katrina on a sustainable basis.
>> what about this week’s report and comments from federal reserve officials? when you look at how the stock market reacted, many concerns there about inflation. you had all the comments out from fed officials earlier this week. when you look at the past five days, what takeaway do you have as most important either on the inflation front or the economic growth front?
>> we haven’t seen much on the inflation front that’s materially different. oil and gas prices came off a little bit but are still very high and starting to work through the economy. we heard from many fed officials and they have stepped up rhetoric on inflation. they’re expressing greater concern, raising the prospects that they may go further than what we had imagined in terms of raising interest rates and the markets aren’t performing so well because of that, they’re worried the fed’s going too far and that’s why we see the equity market falling back. it’s not one specific economic data point but a sense that the economy is perhaps more vulnerable going into next year and the fed is still lifting interest rates, trying to fight the inflation poison as one fed official spoke of it this week.
>> where do you see the rates headed? where do you see the fed going by year-end?
>> by year-end, it’s almost pretty easy. they’ve given us a strong indication on that for a few weeks now. they should be raising at each of the next two meetings. we have a november meeting and december meeting so they should be lifting a quarter point at each meeting, giving us a year-end fed funds target of 4.25, which is where we expect them to stop in this rate hike cycle. the problem is, is i think we’re getting―comments from fed officials, keep hinting at even more rate hikes in the pipeline going into early 2006.
>> how are you changing your forecast, if at all?
>> i’m not changing it yet. i’m watching. i think the inversion of the yield curve, which is something the―the treasury yield curve, which is something i expect to happen by year end, ought to be slowing the fed. i think some of the information we get out from the consumer may also stop the fed at that 4.25%. but i do see, to me, risk of needing to raise my interest rate forecast for the short-term interest rates going sgoirst and early part of 2006 and then cutting my growth rates. if i start raising my fed funds targets, i’ll probably be cutting my growth g.d.p. forecast also for 2006.
>> by how much?
>> i’m at 3% now for the year and, again, i’m not making any forecast changes because i don’t have the fed raising rates beyond that 4.25. but i could see myself pushing it down to 2.5%. that may sound ok but it’s getting to a point where people will not be happy below 3%, you’ll start to see confidence, rode in this economy.
>> we started by introducing you, saying some investors, some economists say the fed is raising too fast and too far. how too fast do you think the fed is going?
>> they seem to be―they’re keeping with their measured pace so i don’t know if it’s going to be too fast. they’re moving steadily. i think that part of the equation is ok. it just seems to me too far is the right focus on this discussion and one problem, i think we have, is that the fed wants to keep raising until they see rates as neutral. the problem is, it’s very difficult to recognize what is a neutral rate. we often don’t recognize it until we’ve already gone beyond it and that’s a mistake fed policy has made often in the past, it’s very difficult to, because of the lags involved between the rate hikes and how it impacts the economy, it’s very difficult to determine where that neutral point is. one of our best indicators of that is the slope of the yield curve. this is where, to me, real worry comes in because you have an extremely flat treasure yield curve right now. the signals from fed officials is that the yield curve may not be as good a predictor as it has been in the past and i don’t like it when i hear it’s not the same this time, it’s different this time. we’re getting a clear warning from the market that perhaps the fed is going too far and they tend to be dismissing it.
>> steve, thanks so much for joining us. steve gallagher, chief u.s. economist at societe generale. in a month where the economy did lose thousands of jobs. one 15-year-old managed to secure a new one, one that pays pretty well. we’ll tell you about it coming up.
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Listen Market briefing -- Ellen (slow)
Taking stock --- Daniel (slow)
NYSE ---Allan (slow)
>> welcome back to “after the bell,” i’m ellen braitman. 30 after the hour. let’s recap the day on wall street where stocks gained, after the latest report on employment showed the economy lost fewer jobs in september than had been forecast. that renewed confidence companies will sustain their profit growth. the dow ending the day higher by five points -- there has been speculation that stocks this year may not duplicate the fourth-quarter rallies seen in the past decade, the sentiment bolstered by surging fuel costs as well as concerns about inflation. we’re now joined by bloomberg news reporter daniel hauck with “taking stock.” what are people saying might be different this year without a late-year rally?
>> we had a good third quarter, which was unusual so coming into the fourth quarter, investors had to be feeling pretty good. one investor said normally every quarter we face challenges but this quarter it’s unusual because we’re facing so many challenges at the same time and many challenges we haven’t seen for a long time and obviously this week highlighted one of those with inflation. you had three fed officials talking about inflation. we also had signs in some of the prices data that the fuel costs you’ve mentioned are starting to spill over in inflation and at the same time we are seeing signs in the economy that things are slowing. the report in the services is industry wasn’t good this week and we still have fuel prices near record highs.
>> we talked about how stocks were higher today and on friday that there are expectations earnings will continue to grow. what are expectations looking like for earnings growth and how analysts have changed expectations?
>> it’s cloudier than normal given that no one knows the effects of the hurricanes. so people will watch the profit announcements seeing what the effects were and what people are saying anything forward. we have had analysts cutting forecasts on most non-energy companies. i believe eight of the s&p industries had their forecasts cut and particularly it’s companies that sell to consumers, which makes sense because consumer spending and consumer confidence is dropping because of the hurricanes and we saw raw materials forecasts cut as alcoa came out with a warning on third quarter profit and announcing earnings on monday. people will look at signs from other hurricanes as to how -- other companies as to how much the hurricanes will affect companies going forward.
>> what do investors point to as to why stocks are going higher?
>> it’s tough to go against history. the first reason is enough investors believe that stocks will go up in the fourth quarter, it would be a self-fulfilling prophecy. we have buying by fund managers and money falling into the market and at the same time, the economy is not in that bad of shape as the jobs report wasn’t as bad as some expected and although analysts are cutting forecasts for earnings, earnings are suppose to grow 16% the next couple of quarters, which is better in the next quarter.
>> another story that we’re following today, the new york stock exchange, planning a big share sale after completing its takeover of able go -- archipelago.
>> the big board plans to let seat holders carb in―cash in early. secondary stock offering could occur in the next few months, right after the new york stock exchange completes its acquisition of 70% of archipelago holdings, electronic trading company. u.s. stock exchange c.e.o. john thain informed seat holders of the offering.
>> john thain alleged there would probably be a secondary very soon after the deal is committed, if completed. and he did say that there were a number of investment banks that could very easily do this deal.
>> for each of the exchange’s 13,66 seats, owners will get about $13 million -- $300,000 in cash and $3.2 million in stock.
>> it’s much too soon to really think about a secondary. i think you have to take one step at a time, as i said, first things first and first is the enormous step of converting fora a non-for profit to profit to a public company. that, in itself, is so dramatic when you look at the history of this institution.
>> thain told championship members yesterday that the vote on the plan to buy the electronic trading network may be completed in november, requiring a 2/3 majority for approval so the deal could be wrapped up by january. under terms of the deal, each member will be able to sell 1/3 of his shares 1 year―one year after the deal completed, another share after the second. ellen?
>> quite a move up. allan, thanks so much. we’ll take a quick break. when we return, more on the september jobs report. looking specifically as what it will mean for the federal reserve and for the u.s. economy. we’ll be joined by chief economist at societe generale joining us.
