Tags: Summers | Fed | US | rates

Larry Summers and Other Pundits Assess Economy Ahead of FOMC Meeting

By    |   Monday, 27 Apr 2015 07:07 AM

Several prominent pundits have given their views on how the economy stands as the Federal Open Market Committee prepares to meet later this week, perhaps to alter its guidance on when it will begin to raise the federal funds rate, even as some observers still doubt this will happen.

Speaking to CNNMoney, former Treasury Secretary Lawrence Summers spoke of a debate between himself and former Federal Reserve Chairman Ben Bernanke over whether the economy is in a state called "secular stagnation," a term of art in the economics profession that goes back to 1938 when it was coined by Harvard economics professor Alvin Hansen. According to Summers, built-in demographic trends, such as the aging of baby boomers, are creating a "savings glut" that is accompanied by a lack of attractive vehicles for investment. Summers adds this protracted period of low interest rates can create asset bubbles. He advocates offsetting the slow growth somewhat and taking advantage of relatively low wages and interest rates by investing in public goods, such as bridges, airports and other neglected infrastructure.

Joseph LaVorgna, a managing director of Deutsche Bank, used the term "super taper tantrum," which was recently used in an International Monetary Fund paper, to recall to CNBC an incident in May 2013 when markets reacted to ideas that the Fed might be about to raise interest rates and spiked 140 basis points within an eight-week period and to raise the possibility that a sharp move could occur again as markets re-price assets in anticipation of a rate hike, and he stressed that "there is nothing [Fed Chair Janet] Yellen can do" to prevent such a reaction.

This is consistent with a view long expressed by this writer that the Fed does not have the ability to engineer an orderly rise in rates, and since at least some investors doubt that the Fed will act anytime soon, if at all, if the Fed does raise rates, the market might spike.

Alison Deans, chief investment officer for CRT Capital, told CNBC she doubts there will be a "significant rise" in rates, but if it does occur, she warned that markets could panic.

Dennis Gartman, editor of The Gartman Letter and a frequent guest on CNBC, pronounced the Fed's quantitative easing (QE) program essentially over in the U.S., but he emphasized that other central banks have begun strong QE programs, and he recommended that investors become more aggressive in investing in the EU and hedge it by fading the U.S. However, he contends that the notion that a strong dollar acts as a headwind for the U.S. economy has been overplayed because of the ability of American firms to hedge, and he cited Apple as an example of one of the best hedging companies.

James Bullard, president of the Federal Reserve Bank of St. Louis, made a similar point in a recent speech to the Levi Institute in Washington, and he singled out CNBC as a prominent forum for the expression of this idea. Bullard, not considered a "hawk" among Fed presidents, said that the economy has entered a boom phase and that the Fed should have acted last fall to raise rates in order to head off the potential for a bubble as the economy grows at a rate a full percentage point above its long-term potential.

(The Summers video can be found here, LaVorgna and Deans here, Gartman here and the Bullard presentation here.)

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Robert-Feinberg
Several prominent pundits have given their views on how the economy stands as the Federal Open Market Committee prepares to meet later this week, perhaps to alter its guidance on when it will begin to raise the federal funds rate, even as some observers still doubt this will happen.
Summers, Fed, US, rates
573
2015-07-27
Monday, 27 Apr 2015 07:07 AM
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