Straight Story: Worrying about inflation

Marketplace Staff May 4, 2007
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Straight Story: Worrying about inflation

Marketplace Staff May 4, 2007
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TESS VIGELAND:
It’s time once again for our economics editor, Chris Farrell, to help you sort out what’s smart, what is stupid, and what is the straight story. And Chris, here’s the issue of the week. Fed chairman, Ben Bernanke, keeps worrying about inflation. He’s a worrier. And he even says that the Fed may have to raise rates. But I’ve got to tell you, all these latest numbers that we’re getting show that the economy is barely growing. How big a risk could inflation really be at this point?

CHRIS FARRELL:
Well, not much. I mean, that’s what a couple of heavy weights on Wall Street are saying. These are chief economists at Goldman Sachs, Merrill Lynch, UBS, they’re not worried about inflation. In fact, they fear the opposite, slow growth or even a recession.

VIGELAND:
So why would the Fed be looking at raising rates? Why not actually cut them?

FARRELL:
Well, that’s what these Wall Streeters say. They say, hey, Ben, cut the rates. But I don’t think Mr. Bernanke is gonna do it. Here’s the straight story. That Bernanke, Fed is determined to show the world it is vigilant against inflation. It’s not gonna take the bars off the window just because there hasn’t been a crime for a long time. And I don’t think it has any trace.

VIGELAND:
What happens if the Fed continues to raise interest rates in a slow growth environment in this economy?

FARRELL:
Well, the economy continues to slow. Now, here’s the big divide. It’s how do you think about the housing markets, something we talk about all the time?

VIGELAND:
Right.

FARRELL:
The Wall Street economists and also one of my favorite economists, who’s that really an economist, and an investment manager, Bill Gross of PIMCO, you know, he also worries about declining prices in the housing market. All these foreclosures can take the economy down with it. The Fed is saying no. It’s a confined problem. We’re gonna worry about inflation and I think what they’re doing, they’re taking Pascal’s Wager, a famous wager made several centuries ago.

VIGELAND:
And what would that be?

FARRELL:
Well, Pascal’s Wager was,- he said luck. Is there a God, or isn’t there a God? He goes through this whole thing and he decides, you know, if I behave as if there is a God, and there is, I come out ahead. And if there isn’t, I led a virtuous life. From the point of view of the Fed, if Wall Street, the global capital markets, ever think that we’re weak on inflation, the consequences are serious. So I think the Fed is making a Pascal’s Wager. That they’re gonna continue to stay tough against inflation and, by the way, if it turns out that inflation is non-existent, the economy weakens. They’re gonna change their mind.

VIGELAND:
Who, if anyone, gets hurt by the Fed staying tough on inflation as the economy goes sour?

FARRELL:
Well, I wanna go from Pascal to Karl Marx.

VIGELAND:
From God to Karl Marx, OK.

FARRELL:
That’s right. Exactly. The ones who get hurt are the workers. And this comes from Peter Bernstein, the dean of finance economists, in a wonderful analysis. And look, we all know workers have not been getting wage increases. Best you can describe. This economy is wage stagnation. So what happens in the scenario you described, the Fed stays tough against inflation, keeps its benchmark interest rate at five and a quarter percent may be and raises it. The economy slows down. It’s the worker that is going to suffer in this tight monetary policy regime. That’s why I worry about. And by the way, if you look at low-income groups, they’re living in a recession. That’s what the implosion to subprime mortgage market is telling you.

VIGELAND:
Just as on the side here, Greenspan, he was famous for never actually setting a target on inflation.

FARRELL:
Yeah.

VIGELAND:
What does Bernanke said in terms of where the current Fed wants that rate to be?

FARRELL:
Well, they’ve never actually come out in maybe explicit target, which we all thought was going to happen when Bernanke became the Fed chairman because he has a scholar who wrote a lot about that. But the Fed is in a straightjacket. It drives me crazy. They say, we want an inflation rate between one to two percent. So right now, the inflation rate, depending on which one you’re using, is running at 2.1 percent to 2.5 percent. That’s too high. Give me a break.

VIGELAND:
So you think Bernanke is on the wrong track here?

FARRELL:
I have given you an analysis of what I think Bernanke is doing and why he’s behaving the way he is. But for me, I think he’s completely wrong. He should be cutting rates, this economy is slowing, and by the way, there’s no inflation. You have high energy prices, you have high food prices, you do not have high and rising inflation.

VIGELAND:
All right. The Straight Story from our man, Chris Farrell. Chris, thanks for always rising to our inflated expectations of you.

FARRELL:
Well, I try to exceed them, Tess, and thanks.

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