NCPA - National Center for Policy Analysis

Dallas Bank Chief Leads "New Paradigm Fed"

June 2, 2000

Robert D. McTeer Jr., president of the Federal Reserve Bank of Dallas, is the intellectual leader of the "New Paradigm Fed," says the Dallas Business Journal.

McTeer contends economic leaders are making decisions based on obsolete ideas. Among these is the long-held notion that a rapidly growing economy always sparks inflation.

Since mid-1999, the Federal Reserve Board has hiked short-term interest rates six times.

  • The most recent boost came in May, when the Fed raised the federal funds rate by half a percentage point to 6.5 percent, the biggest increase in five years.
  • Increasing the price of borrowed money, inflation hawks believe, can slow the economy and stave off inflation.
  • But when the Fed's Open Market Committee (FOMC) considered the first of those hikes in June 1999, McTeer alone voted against it, and did so again in August 1999.

Because he's a non-voting member of the FOMC this year, McTeer did not vote on the most recent rate increase.

Inflation hawks, McTeer says, view 2.5 percent annual growth and 5.5 percent unemployment as the speed limits for the U.S. economy. When they saw 4 percent real growth and unemployment at 4.2 percent in 1999, they reverted to Keynesian thinking and intervened by raising interest rates.

Yet core inflation in 1999 remained at less than 2 percent. McTeer wants the Fed to focus directly on inflation indicators and ignore the rates for growth and unemployment. He explains it this way:

If productivity and hours worked each increase 1 percent per year, then 2 percent is the limit to noninflationary growth. But if productivity grows 2 percent per year and hours worked grow 2 percent, then 4 percent is the new speed limit.

Source: Rusty Cawley, "Embracing Change," Dallas Business Journal, May 22, 2000.


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