Former Dallas Fed President Bob Mcteer Talks Interest Rates, Inflation And Monetary Policy
by Sheryl Jean
April 10, 2014
Source: Dallas Morning News
Bob McTeer, former president of the Federal Reserve Bank of Dallas, said the central bank’s winding down of economic stimulus “was long overdue” and that it may have kept interest rates too low for too long.
“The time for a taper to phase out [economic stimulus] was long overdue,” McTeer said yesterday at the Rotary Club of Dallas’ economic update. He is now a distinguished fellow at the National Center for Policy Analysis in Dallas.
“While the Fed has kept interest rates low — perhaps too low — it has not printed boatloads of money,” McTeer said. That’s largely because banks beefed up their reserves instead of increasing their lending to businesses, he said.
Short-term interest rates have been near zero since 2008. As interest rates fall, typically consumer spending increases, stimulating economic growth and causing prices to rise.
Yet, inflation — the rise in prices on goods and services over time — continues to run well below the Fed’s 2 percent target rate and the Consumer Price Index was up only 1.1 percent through February.
“In the United States and much of Europe, deflation is close to being more of a policy concern than inflation,” McTeer said. Deflation occurs when prices for goods and services decline over time
The Federal Reserve sets interest rates to achieve maximum employment, stable prices and economic growth. A couple of members of the Fed’s policy setting committee voiced concerns at last month’s meeting that inflation might not return to 2 percent in the next few years, which raises questions about monetary policy, according to minutes of the meeting. One banker suggested that “persistently low inflation was a clear reflection of a sizable shortfall of employment from its maximum level.”
I asked McTeer about a correlation between inflation and unemployment.
He said unemployment — especially long-term unemployment — remain critical problems. More than 35 percent of the nation’s unemployed have been out of work for more than six months.
McTeer does not think there’s a “seesaw” relationship between unemployment and inflation. It’s called Phillips curve and it basically means a higher unemployment rate leads to a lower inflation rate, and vice versa.
“However, I do believe that if you stimulate the heck out of the economy to get unemployment down, you may create some inflationary pressures,” he said. “If you restrict the heck out of the economy to get inflation down, you might have some unemployment consequences. What I’m saying is they both react to the same stimulus, but I’m not saying they are on a fulcrum.”
Generally, the Dallas-Fort Worth area fares better economically than the nation as a whole, McTeer told me after his speech. That’s largely due to the booming oil and gas industry, and Texas’ tax-friendly environment that continues to attract businesses and people, he said.
Employment in D-FW typically grows at a faster pace than the unemployment rate drops because the jobless rate is affected by a constant flow of new people into the labor market, McTeer added.
When McTeer led the Dallas Fed from 1991 to 2005, he was considered an inflation dove. He consistently opposed raising the federal funds rate in late 1990s, earning “the Lonesome Dove” and “Lone Star Loner” labels.