KENT COVINGTON, HOST: Coming up next on The World and Everything in It: Washington Wednesday.
All eyes on Wall Street are on the Federal Reserve this week. The fed is wrapping up a two-day meeting today, its first under new chairman Jerome Powell.
Most analysts expect another hike in interest rates. That’s something Powell alluded to during testimony on Capitol Hill last month.
POWELL: Despite the recent volatility, financial conditions remain accommodative. At the same time, inflation remains below our 2% longer run objective. In the committee’s view, further gradual increases in the federal funds rate will best promote attainment of both of our objectives.
Its benchmark interest rate is expected rise from 1.5 to 1.75 percent. The U.S. central bank could raise interest rates as many as four times this year.
Powell says now is the time for rate hikes with the U.S. economy booming.
POWELL: Robust job market should continue to support growth in household incomes and consumer spending. Solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment.
Unemployment sits at a 17-year low of 4.1 percent. Jobless claims for the week ending February 24th dropped to 210,000. The last time we saw a number that low: December of 1969.
Furthermore, the quality of employment is improving, higher wages and more full–time positions.
And yet, last month the stock market saw a correction, losing more than 10 percent of its value. That included not one but two single-day declines of more than 1,000 points—the first in history.
So what role does Washington play in all of this? And is it helping or hurting the economy?
Here now to provide some insight today is David Bahnsen. He is founder and CEO of the Bahnsen Group, a financial management firm based in New York City.
And David, let me start with this: you work in the financial world, and we all know that if someone sneezes too loudly in Washington, the market might react to that, but when it comes the foundational health of the overall economy, help us answer that question. How much credit or blame does a White House or Washington as a whole really deserve for the economy?
DAVID BAHNSEN, GUEST: The reality is that it really depends. There is so many different movements and levers that are going on in a complicated and large economy that you could have a policy helping things, you could have a policy hurting things, or you could have a policy not really being a factor in any given time. And I think I really do have to say that some of it is forward looking because we are looking ahead to what we anticipate will be the impact of the tax reform bill and I consider it to be extraordinarily positive, but the truth is that the federal reserve and monetary policy, which are really divorced from what Washington D.C. may be doing. They have an awful lot to do with economic activity and economic growth as well.
Okay, well, expand on that, if you would. Obviously, as we’ve talked about, it looks like interest rates are going up. Just in simple terms, what impact does the Federal Reserve have on the economy and on our everyday lives?
BAHNSEN: I mean look, they control the money supply, right? So to the extent that the Federal Reserve raises interest rates and makes the cost of money more and is intended purposely to kind of control a lot of what might be sloshing around the economy. If it costs more to do a project, then less projects get done. And it controls the borrowing, it controls the leverage that’s taking place in the economy. But on the flip side of that, when the Federal Reserve is accommodating with monetary policy, making money easier to come by, making it cheaper then you generally increase borrowing and that increases economic activity. Both sides of this have a pro and a con. When you’re declining your access to money, then naturally you’re contracting what can be done in terms of economic activity. That’s the negative, but the positive is they’re very likely helping to control projects that shouldn’t get done. That aren’t rational, that aren’t economically feasible. And that’s the kind of catch-22, what’s the sweet spot where the Fed is appropriately setting the cost of money to not incentivize bad decision-making, but to keep the economy kind of humming.
David, let’s move beyond Washington here for just a moment. As we talk about the future of the economy, you say China could have a big say in the future of the U.S. economy. They’re our biggest trading partner and you say the fact that our economy is so intertwined with China could be a big problem. Why do say that?
BAHNSEN: Well, I would just say that it’s a risk that needs to be taken seriously. The whole world knows China’s not going to blow up 10 percent forever. So the six percent becomes five and a half, becomes five and a fourth. Yes, that rate of growth slows. But if all the sudden there’s an unexpected disruption, the United States would be very naive to think their economy would not suffer. China’s a major customer of ours and China is a major producer of things we buy. So we are intertwined with them in an economic relationship as they are with us and that needs to be understood. Right now I think a lot of economic forecasts are sort of taking for granted there may not be a disruption with China.
David, what are you most optimistic about with regard to the U.S. economy?
BAHNSEN: In the near term, most definitely it’s the impact of the tax reform. I think the companies being able to do immediate expensing on the business investment combined with the longer-term aspects of a dramatically reduced tax liability. It causes capital to be allocated more efficiently. We like more money in the hands of entrepreneurs and businesses with a profit motive than we do in the hands of Washington D.C. So, short-term, the greatest thing going for the economy that is new is indeed the corporate tax reform. Long term what we like best about the U.S. economy is that we are tremendous believers in free enterprise and to the extent that we continue in our imperfect free enterprise economy, there’s incredible innovation taking place every single day and bodes very well for the future. In between near term and long term, you get hiccups. You get contraction. You get disruption. That’s not ever going to change this side of glory.
Alright, and let me flip that coin. What concerns you the most?
BAHNSEN: What I think is worth watching, what could be potentially alarming to economic health is if the talk of higher inflation, the conversation on inflation expectations were to sort of evolve into actual, real inflation. We don’t see any of it right now. We don’t believe that higher wages means inflation. However, that doesn’t mean that there could not be potentially real increases in the inflation rate. And that would be a concern for a lot of different reasons.
Okay, well explain that a little bit if you would. What are negatives or the consequences of inflation and why does that concern you so much?
BAHNSEN: The negatives of inflation simply means that things cost more into the future. If somebody is making $60 grand a year and then they get a raise to $70 grand a year, that’s a positive. We like that type of inflation when we’re earning more money, all things being equal. But with higher inflation, the yardstick changes. The number of inches in a yardstick becomes different. All of a sudden, that $10,000 increase isn’t really worth $10,000 because prices are costing more in the aggregate. So the best definition of inflation ever offered in economic history is Milton Friedman’s declaration: “Inflation is too much money chasing too few goods and services.” So, in a perfect world what we really want is a sound dollar. That we have adequate amount of dollars in the economy to meet the needs we have for goods and services and those things could be perfectly matched up. It’s not so easy to do.
David, finish this sentence if you would please: the best thing Washington can do for the economy over the next couple years is…
BAHNSEN: The best thing Washington can do is always stay out of the way. (laughs) And so I think that deregulation is a step in the right direction. But more than likely the best thing that Washington could do is one that they won’t do and that is control their spending. The government doesn’t have any money. I cannot say this fervently enough. The government does not have any money that they don’t either get from us in taxes or borrow, which means we have to pay back. Therefore, any dollar the government spends is a dollar that went out of the private sector. So we want to see less government spending so we can see more private enterprise activity, that makes for a healthy economy.
Okay, David Bahnsen, thanks for the insight today. We appreciate it.
BAHNSEN: My pleasure, thanks for having me.