The economic numbers
Interview: Goldman Sachs---McKelvey, Edward---Economist
>> some breaking news. domino’s pizza filed to list an i.p.o. on the new york stock exchange. $300 million of stock. d.p.z. is the reserved ticker symbol. they will use proceeds to pay off some debt. on to economics we go. last month’s retail sales growth surprised economists by its strength. the commerce department says u.s. sales rose 1.8% in march from a month ago as tax cuts and low interest rates helped fuel spending. it was the biggest increase in a year and more than double what even the most astute economists expected. excluding autos, sales jumped 1.7%, the more in four years. a separate report showed business inventories rose .7% in february. the increase was the sixth in a row and biggest in more than three years. economists at morgan stanley raised first quarter growth forecast to about 5% from 4.4%. a year earlier the gap was $59 billion, i presume that is the government’s trade deficit, not the federal budget delve 1i. march rose 16%, while spending increased 19%. today strong retail sales confirms a growing economy. no question about it. edward mckelvey joins us from his firm in new york to discuss the economic numbers and his outlook how do today’s retail numbers by themselves affect the federal reserve’s mindset?
>> he’ll, clearly indicate the consumers continue to spend. i don’t think they have a great deal to do with what the fed does in the next several months in isolation because the fed will be concerned about how that translates into employment, what it ultimately means for inflation. there is a long string of connections there that they’ll be interested in.
>> if we look at your forecast from a week ago of the 10-year note ending yeert with the yield down at around 3.9%, does .9% still stand within the hallowed walls of goldman sachs?
>> it certainly does. not too long ago we were at .7% wondering if we were going lower. right now there is a lot of concern about inflation. that may continue for a while. np the end i think we’ll be ok much.
>> how can the fed not get a little edgy if the economic data continues to flow in? >> the big answer to that question is very simple. they want inflation to go up. they don’t necessarily want to it get out of hand, but it’s at a low level and they won’t mind seeing some strong growth if it produces a little bit of inflation. people, i think, are getting much too much ahead of themselveses in translating this into sustained inflation, which i don’t think it necessarily does. and second to that, what it means for the fed policy.
>> if you take a look at the weekly chart of the fed funds target rate going back five years, when president bush took office in 2001, the fed funds rate was at 6.5%, immediately cut to 6% and falling ever since to 1% today. sorry to bore you with the history lesson but the reality is, was commit six times stronger three years ago than it is today? 1% rates versus 6% rates? the discrepancy is enormous.
>> but i don’t think you want to put it in proportionate terms like that. that was right at the top of the economy, right before the economy went into recession that rate cut began. the key point right now is even though the fed funds rate is as low as it is, the fed would still like to have a bit bigger cushion than it does now between the current inflation rate and what could be eventually deflation if the economy turns sour. it’s not turning sour.
>> does the fed want that or the bond-buying community want that?
>> want what?
>> that cushion, that delay.
>> i think the fed wants the cushion. the fed wants that cushion to stimulate the economy if it should weaken at some future point and they have the concerns about the measure of inflation to begin with.
>> why is the cost of tightening prematurely the cost of tightening too late? why would the point or 1/2 point, why would that make a difference?
>> well because, first of all, 1/4 point is not just 1/4 point, it’s whatever the market has translated into we know even with the market ‘s current sentiment if you get that 1/4 point, you are going to get people saying, well, this is the first of many, many moves and the bond market will react accordingly. i think the risk of that is thought puts an economy that is just barely gotten itself onto a sustained growth path onto something that could be quite a bit chancier.
>> we’ll leave it there. thank you for joining us. folks, he is the senior u.s. economist with goldman sachs on their economic team. the s.e.c. is issuing new mutual fund rules. details of today’s decision are up next.
