No consensus on Angell's prediction of a recession

SUNDAY OUTLOOK

September 18, 1994|By Timothy J. Mullaney

Former Federal Reserve Governor Wayne Angell caused a stir on Wall Street last week as he told clients of Bear Stearns Cos., where he is chief economist, that he expects the economy to enter a recession in 1996. He said the high price of gold shows the Fed's policy of fighting inflation by hiking interest rates isn't working, and said higher rates will prompt a recession. But do other economists agree?

Alfred Smith

Chief economist, NationsBank Corp.

I think the growth rate is going to be subdued. Unemployment will be a little higher than it is now. Inflation will be a little higher. I think it will be a 2 to 2.5 percent growth rate, and there might be a down quarter. If the Fed is successful in achieving a soft landing, there will be a down quarter. I think by and large they are going to do it. They are committed to it.

I agree there's no long-run trade-off between unemployment and inflation. If you have low inflation that will give you the best growth you can have over time. I think the low inflation target is the right one to have. I would also like to see a tax cut. 1995 would be the time to do it. It would also dovetail nicely politically. I think tax cuts are anti-inflationary. You tend to stimulate savings and investment. I'd also like the emphasis of taxation to be shifted from income to consumption. There's an argument that people are better off if you tax consumption, because then they can make choices, where with income taxes they can't make choices.

We may have a down quarter, but by and large the Fed is going to succeed.

John Wilson

Executive vice president and chief economist, Bank of America

The question is whether the Fed is moving far enough already to slow the economy down to a soft landing. The information is mixed on that.

The key to Main Street is what happens to 10-year rates because that's what prices mortgages. The mortgage rates set the tone. If the markets say the Fed is on top of the situation, you'll see a flattening of the yield curve, which means short-term rates will move up faster relative to long-term rates, which will stay fairly stable. The benefit would be that the cost of borrowing would be kept lower, and the cost of mortgages would be fairly constant. That's critical to achieve the soft landing. That's the whole issue. If long rates take off and go higher, we'll have a much weaker economy.

My expectation is that the Fed will be successful in engineering the soft landing. They haven't done it in my lifetime. But what we have, opposed to other economic recoveries, is that we don't have an overheated economy.

At this stage of recoveries in the past, we have had a much stronger economy, much stronger job growth, much stronger personal income. That's what creates the cycles.

James Grant

Grant's Interest Rate Observer

I wish I could be as sure of anything as Wayne Angell seems to be of everything. I just don't know how he knows there is going to be a recession. He has an enviously clear understanding of what makes this multitrillion-dollar economy work. Apparently the Fed closes one valve and opens another, and the result is manifest to, if no one else, Wayne Angell. I'm not privy to this magical schematic diagram. I am reduced to wondering where the market will open tomorrow. I have certain ideas, but nothing with certainty.

What bothers me about Angell's analysis is the spurious, mechanistic way Wayne projects. Angell projects that the world is simpler than I think it is. If it were as simple as making an obvious deduction from the publicly posted price of gold, we would all be a lot richer than we are.

Jude Wanniski

President, Polyconomics Inc.

I have been in disagreement with the Fed policy this year of raising interest rates in an attempt to deflate inflation expectations. If you note, even the price of gold, which Fed Chairman Alan Greenspan said is the commodity that best reflects inflation expectations, is at $390 an ounce today, five dollars above where it was February 5, when Greenspan began tightening.

The kind of tightening he should have been doing is one that would have lowered the gold price. You do it by ignoring the Fed funds rate and selling securities to get money out of the system. The Fed is on a treadmill. They have to abandon it because all it's doing is gradually slowing down the economy.

If they continued on this path, Angell would be right -- we would get a recession in 1996. This is why supply siders have been arguing for 20 years that we should go back and peg [the value of the dollar to] gold. It really turns the power over money supply over to the markets.

By just raising interest rates, we're getting nowhere fast.

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