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Angell: Fed will reinflate
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October 7, 1998: 9:14 p.m. ET
Former Fed governor says a rate cut could come before next FOMC meeting
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NEW YORK (CNNfn) - Former Federal Reserve governor Wayne Angell said Wednesday he believes the U.S. central bank will reinflate the economy to stave off recession.
In an interview on CNN's "Moneyline News Hour with Lou Dobbs", Angell, now the chief economist at Bear Stearns, said the Fed could even move to cut rates before the Nov. 17 meeting of its Open Market Committee if current market turmoil fails to subside.
Yet even barring a speedy market recovery, Angell said, the perception of risk to the U.S. economy will virtually compel the central bank to cut rates further.
"Eventually, the Fed will reinflate and the next recession will not come until we have an increase in the rate of inflation and the Fed gets back to doing what it always does to cause recessions," Angell said. "Recessions always come when the Fed is pushing rates up, not when the Fed is moving rates down."
At its last meeting, on Sept. 29, the FOMC reduced the federal funds rate by a quarter point, the first downward revision since January 1996.
The cut disappointed some investors who had been angling for a half-point reduction to help innoculate American markets against global economic contagion.
Angell also expressed concern about a perception of risk in the U.S. market that market strategists say could trigger a credit crunch which, left unchecked, would percolate down through the financial feeding chain.
"I've never seen a time when there's been such a blow-up of the kind of risk to the U.S. economy," Angell said. "We've taken a 2 percent trade drag for the first three quarters of 1998 and yet we're still averaging a 3.25 percent growth rate for these first three quarters."
In less risk-averse times, Angell said, "growth would have been too strong for Alan Greenspan and those people at the Fed and they would have been raising rates."
Angell added that he believed the Fed has been somewhat "handicapped in being more than gradualist" due to the relative weakness of the dollar.
"The weakness of the dollar subtracts from the Fed's power," he said. "The German Deutschmark rises in value and increases the Bundesbank's power and makes it more important that we have a decrease in rates in Germany and Europe."
At the same time, Angell asserted the Fed had been successful in arresting the decline in gold prices, "so we're not going to see a continuation of the deflation which now is pretty well confined to scrap steel prices."
Angell made his remarks just hours after J.P. Morgan, the fourth-largest investment bank in the United States, warned that the country is headed for a recession in 1999.
The bank said growth would drop to zero in the first quarter of 1999, and then shrink at a 2-percent annual rate in the second quarter and a 1-percent rate in the third quarter, before returning to positive territory in the final three months of next year.
Angell said the soonest the central bank was likely to move on a further reduction is "sometime midway between the September (29) and Nov. 17 FOMC meeting."
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