Interview: The Dean of the George Washington University
>> the better than expected april jobs report caused treasuries to fall as investors bet the strong jobs report meant the fed will not stop raising rates any time season. susan phillips joins us for a closer look inside the fed. she is the dean of the george washington university school of business. welcome, dean phillips. a month ago everybody was talking about a soft patch, the jobs number disappointing. today everybody’s afraid the fed is going to have to start raising rates faster. where’s the truth?
>> clearly there was a revision from last month. we have seen a spending slowdown, but these employment data were very encouraging. i think the fact the fed remained on a solid track is consistent with this.
>> are they likely to begin consideration of any faster series of rate moves because of this report?
>> i don’t think because of this report. they tend to like to look at trend data. they are going to be looking at spending activity. and there’s been concern people have been having to pay more to fill up their gas tanks, so people are not spending as much. they are making money, but having to spend it on gasoline.
>> you mentioned making money. that is a key point in today’s report. the average hourly earnings rose .3% and pushed up the year over year gain to 2.7%. the fed’s got to be starting to think there is some inflation on the horizon, correct?
>> and i think they have indicated that inflation concerns are becoming a bit more prevalent. they dropped the line about gasoline prices not feeding through to final prices. so inflation, i think, yes, definitely a developing concern.
>> speaking about dropping a line the fed left out originally, that long-term inflation expectations are under control. they rushed to get that back in a few hours later. anything necessity fairous there? anything nefarious there?
>> i think they were trying to make a point that they believe that inflation concerns may be short-term, but they are not seeing more of a long-term concern about inflation. that is something they are going to watch and obviously they are watching.
>> how could something like that happen? you’ve been in the room as the fed debates its statement and gets it ready to put out?
>> they usually start out with a draft, then people try to get something added or something taken out, and my guess is that it was just purely a transcription mistake and they used the wrong version.
>> if inflation is picking up, how quickly is that going to happen? we are going to get c.p.i. and p.p.i. numbers in a week. are we going to be seeing inflation picking up to the point where the fed might have to move faster?
>> well, of course as you know, the fed really focuses on the deflators more, particularly personal consumption expendture deflator. they tend to look a bit more long term, but they’ll certainly be looking particularly at the core c.p.i. producer price index don’t feed through quite as directly, but it’s good input. it’s good information. they’ll definitely be watching it. i don’t think with one c.p.i. number you are going to see a change. they’ll be watching for trends developing.
>> the fed seems to have changed its philosophy, no longer trying get ahead of inflation, more like react to the numbers that come in. they’ve almost told us that in so many words in their statement. can they do that or are they taking a risk by trying to catch up if inflation suddenly gets out of control?
>> well, my reading of it is that they believe that long term underlying inflation is not as much of a concern. in other words, we don’t have sort of a built-in psychology of price increases, and people aren’t making their investment and spending decisions on the basis of inflation. what they are concerned about is if a short term trend starts to take hold and then we start to see inflation expectations building, and that whole psychology changing, so i think that they are drawing a real distinction between short-term run-ups in prices that may well be reversed as production and expendture did he significants are made, and longer term inflation psychology.
>> in 10 seconds, give me a number where they stop. how high does the fed funds rate go?
>> oh, good heavens. i think they have to start reconsidering things when they get to about 3.5%. that would be where i would say a reconsideration.
>> all right. a couple of more meetings then. our thanks to susan phillips, former fed governor now dean of george washington university school of business. some investors are saying stocks are cheap, now is the time to buy.
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>> i think we’re going to have strong job creation going forward. the economy remains basically strong. we have low inflation environment. we have good productivity, but not as high as it’s been. and we have underlying good growth.
>> well, this is going to strengthen the hand on the hawks of the fomc committee who will be talking more and leaning more toward continuing the rate increases as we go through the year in the next five meetings of the fed between now and december.
>> this is all telling me that temporary slott patch is no more. that, in fact, we are seeing good improvement in labor market conditions. for the time being, i think financial market players are going to take that word out of the dictionary.
>> those comments following news u.s. employers added 270,000 workers in april, 100,000 more than expected. companies betting the economy is gownsing back from a first quarter slowdown. employment rate holding at 5.2%. here is the bond market reaction. the 10-year note finishing down on the day by just about 7/8, yield at 4.26%. the belly of the curve, five-year note finishing down by 5/8, yield at 14 basis points to 3.95%. the two-year note down by a little less than 3/, but yield soaring 16 basis points, 3.71%. the dollar on the day finishes out trading for the week with a good day. it is higher against the yen, the euro and the pound. we’ll see how today’s number plays out for the fed when we speak with former fed governor susan philips, dean of the school of business at george washington university. we’ll get the market side of the jobs record from david joy, equity strategist with a.x.p. financial services. let’s get you caught up on how we ended the day’s trading. dow jones industrials up five points, closing at 10,345. not quite as good for the s&p after an up-and-down day. finishes slightly lower, down a point, 1171. nasdaq finishing higher by more than five, 1967. for the week, dow jones industrials and s&p finishing up by more than a percentage point. nasdaq more than two percentage points higher. in the stock market , we did have a strong start after the jobs report and then some up-and-down trading during the day. deirdre bolton has details.
>> mike, it’s a case of “be careful what you wish for.” strong job growth says any slowdown in the economy will be short lived, but that also means interest rates will have to keep rising.
>> we got to a point today where good news was good news. i think that is good for the market and the economy.
>> that is a double-edged sword. hogan says the report means the fed will keep raising interest rates. that is not such good news for the banks. banks were among the worse-performing groups. bank of america, wachovia, wells fargo all moved lower. merrill lynch cut its price targets saying there is, “ruthless competition for new commercial loans and valuations are not compelling, especially if more borrowers default on their loans as is more likely when interest rates rise.”
>> there are certainly a couple of things you do in a rising interest rate environment. one is to not necessarily invest in financials. they do better after the fed and interest rates have leveled off, if you will.
>> movements in the oil market were felt on wall street. stocks slide to their lows midday as oil rose above $52 a barrel a stronger economy means rising demand for oil and rising crude prices. the jobs report sent some employment stocks soaring. monster worldwide gains pushed its weekly gain to 10%, biggest of the year. robert half at manpower outperformed today along with companies that reported better than expected earnings. pixar is one. its bottom line was lifted by the success of “the incredibles.” they lifted the earnings forecast this year for the second time and g.e. raised its second quarter earnings range by a penny. you can see how those stocks closed on the day. we have g.e. unchanged. pixar with a gain up around 5%. mcafee up around 14%. back to you.
>> deirdre bolton. for reaction to today’s jobs report here is a report from deborah kostroun at the big board.
>> we did see the rally fading a bit in the dow jones industrial average, even though we had that better than expected jobs report where employers added 274,000 workers, doing bet errant prediction of 174,000 workers. take a look how that transcended through the market today. we did see the rally fading on concerns that interest rates will rise. that had an impact on financial. s&p financial index this. was the worst performer of the 10 industry groups in the s&p 500. the concern that higher interest rates may reduce the value of bonds owned by banks and crimp demand for things like mortgages and loans. did you see many of the banks and other financials on the lower side today. one of the best performers in the dow jones industrial average today, that was honeywell. biggest rally in 2 1/2 years. this on word that it could be on speculation that united technologies may make another takeover offer for the rival aerospace conglomerate. spokes people declining to comment on that news, but honeywell getting a lift. take a look the at boeing at a four-week high. another big gainer in the dow jones industrial average, at its highest level since june 2001. this after boeing won an order from northwest airline force 18 of its new 787 dreamliners. that’s valued at about $2.16 billion. also t.g.i. on the rise. they had good earnings. over the past week we’ve been hering a lot of new abouts g.m. and ford. in fact, we did see g.m. losing in thursday’s session and friday’s session also lower, but ford a little bit of a mixed group here. many in the auto-related group, it has been an interesting week with kirk kerkorian talking about the fact he was going to double his stake in g.m. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> nasdaq had the biggest weekly gain in more than three months. june grasso has details in times square.
>> pixar was the leading mover by percentage on the nasdaq 100. first quarter profit more than tripled at the animation studio run by steve jobs. home video sales of its superhero film “the incredibles” helped boost revenue. a note from credit suisse first boston called it, “another blowout quarter.” and said this stock should be boosted by a new distribution deal. computer shares performed well today. siebel systems was one of the most active stocks and also one of the best performers by percentage on the nasdaq 100. the software maker said it plans to triple costs by $14 million this quarter. after the jobs numbers came out, shares of employment services companies advanced. monster worldwide, the owner of the most used internet site for employment advertising. they rose. paychex which provides personnel services has been one of the top performers on the nasdaq during the day. on assignment provider of temporary employees and health care and sciences also rose. dragging the nasdaq down were the banking stocks. the bank index was the worse-performing economic group at the nasdaq. the employment report reviving concerns about higher interest rates. so if you take a look, northern trust and fifth third bancorp, the largest bank on the nasdaq were among those stocks that were down. utstarcom dropped more $3.
>> bloomberg news has learned federal and state prosecutors are investigating whether maurice greene berg, former c.e.o. of american international group, seen here in file footage, tried to prop up the insurer’s stock price before an accounting probe forced him out. they are examining whether he ordered an executive to buy shares as the price was falling. stock price investigation adds to probes of greenberg’s role in accounting errors that helped inflate the company’s net worth by about $3 billion. news from berkshire hathaway. ahead of its rernings report. warren buffet’s company buying the medical practice insurance unit of general electric for about $825 million. medical protective insurances about 75,000 doctors and dentists and told $740 mfl policies last yeemplet buffet told shareholders of a pending acquisition last weekend saying the deal is one of the few opportunities he found to deploy some of his $44 billion in cash. we’ll continue our coverage of the april jobs report with a look at how the fed will view the data. we’ll get some insight into the fed with former federal reserve governor susan philips. that’s next.
