Dallas Fed Chief: Where's the Rebound? McTeer Sees Pieces for a Recovery in Place but Steers Clear of Timetable
by Angela Shah
The Dallas Morning News
Sept. 2, 2001

Robert McTeer looks confidently for an economic rebound. Predicting its arrival is another matter.

"I've been thinking it's right around the corner for months now," said the president of the Federal Reserve Bank of Dallas. An unabashed fan of the new economy, Mr. McTeer admits that he's been a bit humbled by the persistence of the slump that threatens to halt the longest U.S. expansion ever.

Yet even as he shies from offering a firm forecast on when the slowdown will end or how high the unemployment rate might rise, he sees the essential ingredients for recovery in place—strong action by the Fed, tax-cut checks in consumers' pockets and lower energy prices.

During a meeting with editors and writers at The Dallas Morning News last week, he spoke of the new economy's bust and possible rebirth, and the fear in the stock market.

He also defended the Fed's attempts at engineering a soft landing with its 1999-2000 interest rate increases aimed at cooling a red hot economy.

Mr. McTeer has not been a voting member of the Fed's policy-making committee, which has cut a key short-term interest rate seven times since January—the most aggressive cuts of Chairman Alan Greenspan's tenure. President of the Dallas Fed since 1991, Mr. McTeer returns to that policy-making role next year.

It was from his perch on that committee that he gained national prominence for extolling the marvels of the tech boom.

As a public speaker, he takes the road less traveled when describing economic theory - expounding on monetary policy, for example, by talking of night shifts pumping gas at his father's truck stop in rural Georgia. He's also prone to invoking the wisdom of Elvis and the singer-songwriters he calls "picker poets."

He didn't drop any of those names in the interview. Nor did he bring along his "New Paradigm Frog,'' a figurine he uses as his New Economy mascot, though he said he had considered it.

But he did leaven his remarks with lighthearted suggestions about how consumers can prop up the beleaguered telecom sector—"use their cell phones more and upgrade''—and bolster the economy by spending their tax-rebate checks.

Keep shopping, America, he said.

The McTeer household, though, will use its tax-rebate check to pay credit card bills, he added.

Here are excerpts:

Question: Let's start with something simple. What's going to happen with the economy?

Answer: Every time we have a new round of statistics, I expect that the next round is going to be much better. And we are accumulating reasons to expect that, but so far it hasn't happened. I must say that I have been a little bit surprised and obviously disappointed that we haven't made a sharp turn yet on the upside.

Mainly the reason that leads me to hope and expect that things will get better before long is that the Fed started easing very aggressively in January.

Monetary policy has now been joined by fiscal policy in switching over to fiscal stimulus, with the checks literally in the mail. I must say that I didn't like that provision of the tax bill, but it's turned out to come in very handy. It's timed beautifully.

Of course, that was an accident. We'll take what we can get.

The third thing is that energy has stopped going up, and we've been getting a little relief on that. [They] are all pushing us in a positive direction.

This slowdown's been very unusual. The thing that's been saving us is the consumer.

They've been doing something that's probably irrational from the point of view of the individual consumer because they all need to be saving more: saving for retirement, saving for college and all of that.

But we'd be in bad trouble if they started doing the rational thing all of a sudden. We're happy that they're spending. We wish that they didn't have to run up a lot of debt to do it. But it's not something we're terribly worried about right now because their assets are high.

Question: One thing that occurs in previous cycles when you saw big leaps in technological innovation—railroads, the automotive industry—you saw a big burst in productivity and then things fell back. Are we going to see this burst look a lot like that pattern in the past?

Answer: Speaking to someone who's out on that new paradigm limb?

I can't imagine that after this slowdown is over with, in history, that we won't go back to fairly rapid productivity growth. In speeches I sometimes say, "We haven't lost any of the recipe books. The recipe books for silicon things are still there. They aren't going away." Biotech is just getting started. So it just seems natural to me for it to go back to a fairly rapid rise in productivity.

[New Economy] ideas are being picked up ... by older economy firms. It's not reasonable for ... [productivity] to grow very rapidly during a slowdown. And you probably wouldn't want it to. If it did, it would mean that your pickup in activity was being based on technology rather than sustaining employment.

So right now, with people worried about unemployment, I'd just as soon see productivity growth pause a little bit and let's sustain job growth.

Question: You mentioned last week about unemployment and you expected that to go higher. How high do you expect that to go, and when will we see a reversal of that?

Answer: You know that I don't know the answer to that. But we've been below potential for a year now. Last year, unemployment got as low as 3.9 [percent] during three months, and most of the other months it was around 4.

And it's only gone up from 4 in December to 4.5, and that's not a lot, considering a year of below-potential growth.

I don't want to create any self-fulfilling unemployment prophecies by putting out a number, but I expect it'll be above 5 percent even if we start picking up pretty soon.

Question: The technology sector ... there's been a huge shakeout there. Have investors moved from irrational exuberance to irrational fear?

Answer: Well, they've moved from irrational exuberance to fear.

I suppose that it's probably overdone. People that think it's going to be years and years before there's relief are really not being rational.

But the problems are real. So there's a lot of rational fear involved in it as well.

I don't understand what happened.

I was interviewed a few months ago and I said, "We had a bubble in the high-tech sector of the stock market, the Nasdaq particularly, which has burst." ...

We did sort of have a bubble in the high-tech sector of the economy.

We were so enthusiastic and the Internet was just going to be so wonderful and everybody was figuring out their own way to make that work. And it just sort of fed on itself and went overboard.

And so it's going to be a while before they can work off their inventories of unsold equipment in that sector.

Question: Is it possible to engineer a soft landing?

Answer: I think we did that in '94. ... The Fed between February '94 and February '95 gradually raised ... [rates from 3 percent] back up to 6 percent - '94 was a boom year.

We didn't do any damage to the economy in '94. But '95 did slow down considerably because of that. But it didn't slip into recession.

That's one of the few cases where it was fairly successful without a lot of pain. Usually ... a recession is more normal than a soft landing.

Now implicit in your question is that we've caused this slowdown by our attempt at a soft landing. And I don't want to accept that too easily. I want to resist you just a little bit. You may be right. I don't know.

The Fed ratcheted up the short-term interest rate by 1.75 percent [starting in June 1999]. In '94, we ratcheted it up by 3 percent and we had a soft landing. So 1.75 percent didn't seem all that vigorous and strenuous, even to me. And I voted against the first two of those [rate increases].

But along came higher energy prices at about the same time. And along came the bursting of the high-tech stock bubble at the same time.

So it wasn't just the tightening of monetary policy that started weighing on the economy.

Question: If you overlay the prospect of global recession on this, what do you get?

Answer: If one country goes into recession and the other countries don't, the other countries help sustain it and help it recover. If they all go into recession at the same time, I guess it's like two people standing in quicksand, each of them trying to help the other one come out.

We're dragging the rest of the world down, not vice versa. Anybody that trades heavily with the United States is suffering heavily for it right now. Their sinking is making it harder for us to hold up. Our sinking is making it harder for them.

It's been a good while since we've had it so synchronized as this. This is not good that it's synchronized.

Question: Talk a little on the local economy. In North Texas, we're starting to see a steady stream of layoff announcements. Telecom is hurting. Where are we headed here? Is it going to get worse? Have we hit a low point?

Answer:I don't know the answers for that.

For the last few years, the strongest part of Texas was Austin and North Dallas, Richardson.

They were strong because of high-tech concentrations. Right now, they're the weakest part for the same reason.

What needs to happen is, people need to use their cell phones more and upgrade.

Question: What's your guess on the recovery? Economists have sort of shifted from mid-2001 to end-2001. Now we're looking at February next year. Where do you fall?

Answer: I don't have a guess. In speeches I've been trying to say I'm optimistic on the U.S. economy in the long run, and people have been misinterpreting that as optimistic on the near-term recovery. And since I don't have a clue, I try not to get hoisted on that petard.

I've been thinking it's right around the corner for a few months now. I've been humbled a little bit by it.

This thing is lasting longer than it was supposed to.

Copyright 2001 Gale Group Inc. All rights reserved. COPYRIGHT 2001 The Dallas Morning News, L.P. Reprinted with permission.