By Steven K. Beckner
CHARLOTTE, N.C. (MNI) – Participants in a Richmond Federal Reserve
Bank conference heard a mixture of gloom and cautiously optimistic
assessments of the outlook from top economists and market professionals
Thursday.
Glenn Hutchins, a director of the New York Federal Reserve Bank and
co-founder of investment firm Silver Lake, sounded the least upbeat at a
Credit Markets Symposium held at the Richmond Fed’s Charlotte branch.
Echoing recent comments by Fed Chair Ben Bernanke, Hutchins
observed that non-farm payroll gains in recent months are “stronger than
underlying economic activity” and this suggests those gains and
accompanying reductions in the unemployment rate are “more likely to be
transitory.”
“This is a broken job market,” said Hutchins, estimating that
unemployment would be 11%, not 8.3%, if labor force participation was
at pre-recession levels.
Bernanke cited growth of the gross domestic product as a
constraint to continued labor market improvement, and the New York Fed
director supported his position.
Although the Commerce Department reaffirmed its estimate that real
GDP grew by 3% in the fourth quarter, few expect that rate to continue.
It grew less than 2% for all of last year.
Hutchins said 2% growth “generates no new jobs” because it merely
keeps up with growth in the labor force. Even if the economy grows by
2.5% a year, he said the nation would not get back to full employment
until 2030.
Achieving the faster growth needed to reduce joblessness will not
be easy, Hutchins suggested, noting that continued “deleveraging” from
high levels of debt relative to income is going to continue to depress
consumer spending in coming years.
“It’s going to be a long hard slog” to get back to the
debt-to-income ratios of the 1990s, he said, adding that therefore “it’s
very hard to imagine this engine of economic growth driving a more rapid
expansion.”
Hutchins, a special economic advisor to President Bill Clinton,
also noted that new small-business start-ups — traditionally the source
of much job creation — have been weak. Hence, “there has been a
substantial decline in the feedstock that drives new jobs.” The real
estate market has improved a bit, but is still just “scraping bottom.”
And the economy will also be facing a large potential “fiscal
drag,” as well as the burden of a “massive trade deficit,” he said.
Hutchins said he did not want to talk about monetary policy, but
pointedly noted it took 30 years for interest rates to “get back to
normal” after the Great Depression of the 1930s.
Stuart Hoffman, chief economist of PNC Financial Services Group,
was more upbeat — enough so to predict that the Fed will need to raise
short-term interest rates before the time frame envisioned by the Fed’s
policymaking Federal Open Market Committee — “late 2014.”
“The probabilities are not quite as skewed to the downside,” said
Hoffman, saying that he has increased his forecast of job growth,
though not as high as the recent average of 250,000 per month.
Hoffman said unemployment will likely be below 8% at the end of
2012 and 7.5% at the end of 2013.”
Citing Bernanke’s recent comments, Hoffman said monetary policy is
“clearly about jobs.” He interpreted the Fed chief as saying that labor
market improvement is “encouraging but not convincing that we’ve reached
sustainable economic expansion.”
Hoffman said he is “a little more optimistic than that. I think we
can sustain job growth close to 200,000.”
He also pointed to “quite healthy” business investment and
increased credit availability.
On this latter point, he was in tune with Richmond Fed President
Jeffrey Lacker, who in opening the conference said “credit markets are
on an upward trajectory.”
Lacker made no other substantive comments, but is due to address
economic and policy issues Thursday evening in a speech and press
conference.
Lacker dissented at the January and February FOMC meetings
against holding the funds rate near zero “at least through late
2014.”
Hoffman was inclined to agree, anticipating the FOMC “will start
to take the rate up before late 2014.”
“If the economy does better, if the forecast is upgraded, it may
well mean raising rates sooner than late 2014,” he elaborated. “That
would be the right thing to do.”
Hoffman said “the market would move rates up ahead of any hike in
the federal funds rate” and lead the FOMC to “change the timing” of
official rate hikes.
Even a 1% funds rate “might be considered extraordinarily low,” he
said, noting that over the years a 4% nominal rate has been “the normal
heartbeat of the economy.”
“I assume there will be no QE3,” Hoffman said. “I don’t think it
will be necessary.”
Jay Bryson, managing director and global economist for Wells Fargo
Securities, cautioned that the European debt crisis “has died down,” but
is “not done.” It still “has the potential to be a big thing.”
** MNI Washington Bureau: 202-371-2121 **
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