Fed's cut (slow)
Interview: JP Morgan Securities---Glassman, James---Economist
>> welcome back. economists agree that at next week’s federal reserve meeting the fed will cut interest rates. the question is by how much? our next guest says its possible the fed could lower rates by a whole 1 mafl. jim glassman a senior economist at j.p. morgan securities joins us from the firm at new york city.
>> my pleasure.
>> let’s begin t fed meets next week. what do you expect them to do? you say a half a point cut. tell us your reason.
>> well, the fed really got us where we got by talking about the need for insurance and they talked about cheap insurance and the need for more fire breaks. and while fed was talking the market was starting to move in the direction of a half a point cut and nobody disagreed with that as a fed. i think firstly the better the economy―the better this news is the more the economy starts getting a lift tand mood comes back. i think the stronger the case actually for a big move to bring closure to this whole thing and make sure they’ve got just enough in place. i don’t think the fed is at all afraid of putting in too much signal. i think that’s perfectly appropriate. the economy is doing better but it’s not doing so well that we are seeing any hiring. that’s the problem. so there is a long way to go to get growth up to where it should be.
>> you mention hiring. i was going to ask you about that. do you see with the characterization of this as a jobless recovery?
>> a job loss recovery. for getting―employment has been declining. that is right. that’s really―at the final day that is the final test of what this kind of―what the growth is adequate or not, and we are not growing adequately until you start to see employment growing, jobless claims coming down. unemployment coming down. that may start happening this fall as the economy picks up speed like we are expecting. but it’s not happening right now.
>> and so what does this portend for consumer spending if you are calling it a job loss recovery? that can’t be a positive indicator.
>> that’s why consumer spending has been pretty moderate so far. the main thing helping the consumer right this now is those who do have jobs greting paid reasonably well. our activity gains are helping but there are also tax cuts coming and they started in june and those rebate checks coming. the consumer will be getting some support from tax cuts that just got passed. but we’ve got to have a real hiring to get sustained pickup in consumer spending, and that’s what we haven’t seen yet. i think that’s coming. >> do you think the fomc is going to base its fed rate decision on just the economic fundamentals or will it look at the market and see where the bond market is predicting fed funds rates to be and basically being more likely to announce a half point cut if fixed income investors are expecting a half point cut?
>> the reason fixed income investors are expecting that though is the fed guided us here. the fed began talking weeks ago about deflation, deflation risks a need for cheap insurance, for bigger fire breaks, and so the reason the market is pricing -- has been pricing a―the discounting a bigger fed cut is because the we thought fed was hinting at that. so i think the justification for it is really more insurance against the risk of deflation. nobody wants to get close to that risk, and the economy has got a long way to go to get there. so i think as good as things feel today, you can’t put in too much. i don’t think that’s the way the fed feels.
>> let’s assume for the sake of argument we are going to get a 50-basis point cut, do you think when rates are this low is a 50 basis point cut as stimulative as if rates are higher or is it equally as stimulative, have you done economic analysis?
>> my feeling is it’s stimulative as it ever is. rates are rates. when rates are there low the percentage change of the 50 basis point cut is much bigger than when rates are high. i think personally the economy doesn’t need lower rates. it just needs strong messages, constant reminders that the federal reserve, washington is resolved to speed things up. i think that is the most important message here, and it’s a message of making―taking out maximum insurance against deflation. you can tell looking at the financial markets, credit spreads come in, the starbt doing better, the dollar down, those are all signs that fed’s low interest rates are already getting pretty good tracks. so the main reason for the fed to be doing something is just to send a strong message that they are going to do what it takes to get things moving.
>> the first thing on the lips of many investors we talked to today was this new york area manufacturing number, the number coming in at 26.8, 10.1 had been expected.
>> yeah.
>> tell me the meaning of the new york area manufacturing number.
>> well, by itself it was a very striking number. i mean we haven’t seen this kind of improvement since the recovery from 2001, the fall of 2001, and again last fall when the manufacturing cuts came back. the problem is this is a very new survey, and the new york area is only part of the u.s. economy. but keep in mind if things are coming alive here in new york, it must be happening somewhere else here, because new york -- the new york area has been hurt very badly by these events, by the slow economy, by the terrorist attacks. so if new york is coming back, you can bet that other regions on the east coast are coming back. i think we’ll see on thursday the philly fed index showing a bigger pickup, and i think it’s very promising.
>> jim glassman, senior economist at j.p. morgan securities. thanks for being with us. the largest cable company plans to double its ad revenue within the next five years. after the break we’ll have an outlook on how comcast plans to achieve this goal right after the break.
