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Jobs vs. inflation? Relax.
Fed governor Bob McTeer says things are looking up for businesses, workers and the U.S. economy.
October 8, 2003: 8:00 AM EDT
By Kathleen Hays, CNN/Money Contributing Columnist

NEW YORK (CNN/Money) - Who's afraid of the Big Bad Economic Growth Wolf? Not Bob McTeer, head of the Dallas Fed.

He's ready to let the economy run, at least for awhile. That should be music to the ears of those who fear the Federal Reserve will start hiking interest rates as soon as it sees signs of stronger growth.

"We aren't afraid of growth," he told me today on CNNfn's The FlipSide. "We know we need more growth. And when we see it coming, we're not going to panic and say growth is bad."

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Robert McTeer, president and CEO of the Federal Reserve Bank of Dallas, comments on the economy.

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This is important. Some people out there, especially supply side economists who believe the recent rally in gold is sending a strong inflation signal, believe the Fed should be getting its rate hiking tools out of its bag already.

Others, who aren't convinced the recovery has any staying power, worry that the Fed will hike rates prematurely and cut the economy off at the knees.

I asked him if he thinks, after seeing that payrolls grew by 57,000 workers in September, that the economy is finally turning the corner now.

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He said the increase in jobs, coupled with the upward revision in second-quarter growth to 3.3 percent, has convinced him it has.

"This quarter that we just finished is going to be even better. My guess is it will be over 5 percent annual growth," he said. "I wouldn't be surprised if we had begun a series of increases in payroll employment."

Yikes! If the economy were to grow at a five percent annual rate -- at least a full percentage point above the level seen as its non-inflationary "potential" -- won't the Fed get nervous and start raising rates?

"As long as the growth is taking place in a slack economy, with high unemployment rates, low capacity utilization rate, that growth is not likely to be inflationary," McTeer said. "There's not much reason for us to worry about it."

When an economy has been growing at a sub-par rate for several quarters, it creates excess capacity. That means unemployed workers, factories running below capacity, and consultants sitting in their home offices waiting for the phone to ring.

That also means the economy can run at an above-par rate for a while before workers feel so fat and happy that they demand higher wages, or companies feel they can raise prices without scaring their customers away.

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It's hard to believe that a few quarters of stronger growth will immediately vanquish the sense many people have that their company would lay them off at the drop of a hat.

That's not quite how Bob McTeer puts it. But what's most important is that he seems to be saying the Fed is not going to be preemptive in raising interest rates.

"This magnificent increase in productivity we've been having just strengthens the case for letting the economy grow and staying out of the way, until you see the numbers that dictate a change in policy," he said. "Certainly, the beginning of good growth is not going to panic anybody."

Questions from outer space

After such a long, drawn-out period of no jobs growth, it may seem odd to even raise the question of when the Fed might raise rates to slow the economy. It almost seems like a question from another planet.

After all, we've only had one month of job increases after losing about three million over the past three years.

It's not like that jobs report didn't have some red flags, either. For example, the number of people out of work for 27 weeks or more grew by 67,000 to 2.1 million, the highest since November 1983. The number of people forced to work part-time because they can't find full time jobs jumped 12 percent to nearly five million people, the most since November 1983.

Like the bulls on Wall Street, McTeer pointed to five months of increase in hiring of temporary workers as a good leading indicator for the labor market. He said it shows they need more labor, but just aren't ready to commit. The implication is that if the economy keeps growing as briskly as he believes it will, business will pick up so much that firms will be forced to hire.

The folks at Challenger Gray & Christmas, the Chicago outplacement firm that tracks announced layoffs, take an opposite and equally plausible view of the temp hires.

"Employers have neither the money nor the confidence in long-term economic growth to add permanent, full time workers," Challenger economists say.

It remains to be seen if Bob McTeer and the bulls are correct in their assessment of the economy. If they're wrong, rate hikes are the last thing investors need to worry about.


Even if the bulls are right, it's clear that at least one Fed official is willing to take the chance that growth and low inflation can co-exist.

Kathleen Hays anchors CNN Money Morning and The FlipSide, airing Monday to Friday on CNNfn. As part of CNN's Business News team, she is also a regular contributor to Lou Dobbs Tonight.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.