Jones: Economy Heading in the Right Direction Towards 'Soft Landing'
DAVID HAFFENREFFER, CNN ANCHOR: Wall Street is poised for today's producer price index, amid growing sentiment that the economy is slowing down. Is it a soft landing that we're seeing in our sights?</s>DEBORAH MARCHINI, CNN ANCHOR: Or a hard one? For that and the rest of the economic outlook, we are joined by our resident economist and Fed watcher David Jones. Good morning, David. Good to see you again.</s>DAVID JONES, AUBREY G. LANSTON: Great to be with you, Deborah, David.</s>MARCHINI: The question on everybody's minds now seems to be: OK, did the Fed hit the breaks too hard? What do you think?</s>JONES: I don't think so. I think we're actually in about the right position. I would guess a month ago, we would have said a soft landing, a slowing in growth would be odds of 10 to 20 percent. I'd move them up to 50 percent now. So it looks like we're headed in the right direction. And I think the Fed moved just about right, six rate hikes, the last of which, of course, was more that usual, a full half a percentage point. And it looks like we're starting to see that slowing in demand that we've talked about so much on the show.</s>MARCHINI: Some people are now starting to wonder about the odds of recession, are you?</s>JONES: No, we're not anywhere close. Look at that consumer confidence number in May shot back up again, suggesting that the stock market correction, which is key in this process of getting people to slowdown in their spending, has not done enough yet to dent that consumer confidence, based on not only a good stock market over the last five years but good income, a good jobs picture, although that did weaken a bit in May. We're just starting the process of slowing. We have two questions -- the Fed has two questions: How much is the slowdown going to be? And number two, how long is it going to last?</s>HAFFENREFFER: The Fed has raised interest rates six times now. We are now seeing the evidence of a slowdown. How many of those six interest rate hikes have we seen factored into the economy so far?</s>JONES: Well, the first three last year simply offset the rate cuts we saw back in 1998 to deal with the global financial crisis, which seems so long ago now. So I would start counting the three -- the one in February, the one in March and particularly that double whammy that we got in May.</s>HAFFENREFFER: So it was nine months to a year for them to get factored into the economy, then we still have not yet seen the three, right?</s>JONES: Very good question, David, but I will make a small bet. I don't like to bet a lot of money on this show, but I'll make a small bet that things will act faster now, mainly because Fed policy changes works through the capital markets, through changes in bond prices and stock prices. In the old days, we had to turn the banking system around when the Fed changed policy; that took forever, this long time lag you talked about. But I think it's faster now. I think Greenspan believes it's faster too, in terms of when the Fed changes policy and when the economy finally feels the effect.</s>MARCHINI: Those capital markets have a much more direct impact now on household wealth. However, with those consumer confidence numbers so high and with the price of oil still up, is the slowdown we're seeing so far going to fix inflation?</s>JONES: Well, that's the question, Deborah, you posed it perfectly. That's what the Fed's going to talk about at the June meeting. And the answer is this is an art, not a science. Monetary policy is not as precise as people think. They've tightened enough, they think, to slow things down. But they're going to look around and see whether or not, in fact, it's enough, not only in terms of how much we need to slow. We probably should slow actually a little bit below trend in order to get the economy pulled back within its limits. So maybe we should slowdown at some point this year to three- percent growth versus the first-quarter growth rate of 5.4 percent as a comparison and stay there for a little while, so we can pull the economy back within the limits of growth in terms of pressure on the labor market and other things. So it may take a while to do this. And the Fed will simply sit there and say: How does it look? Is it slow enough? Is it lasting long enough? June, for example, I think what they'll do is just keep policy unchanged. But I think they're going to talk tough. I think they're going to say the risks are still on the side of inflation. They don't want the stock market to start celebrating too soon because that ruins the whole show, then spending goes back up, and the Fed loses this chance at a soft landing.</s>HAFFENREFFER: For the most part, the evidence that we've seen that does point to a slowing economy is coming from one month's time. How much more evidence do you need in order to feel satisfied and put a lot of faith in those numbers?</s>JONES: Well, you know, David, I'll give you a forecast, any time you want it here. But in fact, you need two or three months to see whether or not the trend is in place.</s>HAFFENREFFER: But they won't run those by the June meeting.</s>JONES: That's exactly right. One month's data is not enough. So they will be uncertain at that June meeting as to whether or not they, in fact, have tightened enough to do the job. But I would come back to the first question you asked me. It's certainly not too much in terms of rate hikes on the part of the Fed at this point.</s>MARCHINI: Question for you: The Fed has seemed less and less likely to raise interest rates or raise them by a large amount. It seems to have taken some of the head of steam off the dollar; it's weakening a little bit. And I wonder at what point you're concerned about that, whether it will be inflationary or destabilizing to financial markets.</s>JONES: Well, that's a good question, Deborah, because the dollar has been so strong for so long. Our economy has been the biggest and the best performing economy in the world. The Fed has been in the process of tightening. But I get a hint that the hot shot foreign exchange traders are starting to reassess exactly in the direction you're suggesting. The economy is cooling off a little bit. The Fed may not hike rates quite as much and, therefore, U.S. rates may not be as attractive relative to foreign rates. We also have to remember we have a huge trade deficit, which came as a result of demand spilling over into higher imports. All of these things tend to work against the dollar. So I'm guessing that the euro has made a turn here or is starting to make a turn. It had fallen a long time in terms of the dollar, now it's starting to turn up, because we just saw one of those big rate hikes by the European Central Bank. It looks like they've finally got their act together and did something assertive and decisive.</s>MARCHINI: It took them a while. David Jones, Aubrey G. Lanston, great to see you. We'll have you back on in about a half an hour from now.</s>JONES: Thanks so much.