Steady as It Goes at the Fed

Joseph E. Gagnon says the Federal Open Market Committee meeting on November 2 suggests continued economic growth and a likely small interest rate increase in December.
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Unedited transcript

Steven Weisman: Hello. This is Steve Weisman of the Peterson Institute for International Economics. I'm here today, November 2nd, with Joe Gagnon of the Peterson Institute to talk about the announcement by the Federal Open Market Committee saying that the economy continues to strengthen. But, of course, all these statements are read like tea leaves. And Joe, what are the tea leaves telling us here?

Joseph Gagnon: Well, they're telling us very little news. No news today. The statement was exactly as expected. The Committee said that the economy is evolving pretty much as they had expected in their last meeting in September. And most people are expecting they will make a move next month in December. But they said they weren't quite there yet.

Steven Weisman: A move to do what?

Joseph Gagnon: Move to raise rates. And the Committee said they were not quite ready to move rates at this time, but that things seemed to be moving in that direction. And everyone expects December will be the time.

Steven Weisman: What would be your expectation for the amount of the increase; from what to what?

Joseph Gagnon: I think in December they'll raise their target from 0.5 percent interest rate to 0.75, a quarter of a percentage point increase in December.

Steven Weisman: And what does that mean that they're confident that the economy is growing fast enough to accommodate that even minor rate increase?

Joseph Gagnon: Yes.

Steven Weisman: And what did we learn today about how they view the employment situation in the United States?

Joseph Gagnon: I think they're pretty happy with it. The unemployment rate is about where they want it to be. Interestingly, there's actually more jobs being created every month still than we could sustain in the long run. There's actually more jobs being created every month than there are new working-age people in the country.

 What's going on? Well, a lot of people who are out of the labor force who haven't been looking for jobs have started looking for jobs again. They've started to be counted as in the labor force. And so, the labor force is growing allowing them to take these new jobs. That cannot continue forever. But they're happy with what it's doing. And it's reducing this underemployment that we've had for a while.

Steven Weisman: I hate to ask a dumb question, but sometimes those are the most fun. Why can't it go on forever that we create more jobs than there are people to fill them? What's so bad about that?

Joseph Gagnon: Well, I mean there's nothing bad about having people taking more jobs. But, obviously, we can't have more people working than we have people.

Steven Weisman: So I mean I guess what I'm really asking is then inflation becomes a danger or what?

Joseph Gagnon: The worry would be that if there were lots of job vacancies that couldn't be filled. Then businesses were desperate to fill them because they had so much business. They might start raising their prices more because if they can't if they can't produce more goods to sell to you, they'll try to raise the prices since people are banging down their doors to buy their stuff. So that would be a nice problem to have given where we've been for the past few years. But ultimately, people are not happy when we have too much inflation.

Steven Weisman: Right. So the economy is growing at this steady rate positive direction. How long can that last? Can that last for another year, two years, three years?

Joseph Gagnon: Well, the economy can grow forever as long as we have some growth in the population and we have some increase in our technology, ability to produce things, both of which have slowed. But they're not below zero and we do have some improvements and some new workers. So that can go on forever.

Steven Weisman: I guess people are always worried about the next recession. So that's why I'm asking. Can we be relaxed about that? That's not a dumb question, but it's a tricky one.

Joseph Gagnon: It's a tricky question because economists are very bad at predicting recessions. We don't have anyone who's got a perfect track record in predicting recessions. And most of us have a bad record. They say about 20 percent. We say about a 20 percent chance that there could be recession next year most of the time. And we usually don't see them coming.

 So, yes, we should worry about a recession. But I don't see any particular reason. I don't see any obvious thing that you might worry about it. And in the past, sometimes there have been such obvious things like if inflation is very high and the Fed might want to fight it or if the housing bubble or if the housing prices are over-inflated and they're going to come down and people won't be able to pay off their mortgages that could cause you know.

Steven Weisman: Sure.

Joseph Gagnon: So we don't see things like that. But that doesn't mean that there's not something out there. I think the international things would be the big risk for us.

Steven Weisman: Such as crisis in Europe or China.

Joseph Gagnon: China. I think a meltdown in China when they stop buying stuff or in Europe or anywhere really.

Steven Weisman: Well, on that uncertain, but perhaps hopeful note, thank you very much, Joe

Joseph Gagnon: You're welcome.