The Fed's Lone Star Loner

A talk with rate-hike dissenter Robert McTeer

When the Federal Reserve Board raised interest rates on June 30, Dallas Fed Bank President and Chief Executive Robert D. McTeer Jr. cast the lone dissenting vote. And it appears he may have disagreed with the Fed's Aug. 24 hike. McTeer, who joined the Fed in 1968 after receiving his Ph.D. in economics from the University of Georgia, became president of the Federal Reserve Bank of Dallas in 1991, after working for the Fed in Richmond and Baltimore. McTeer's dissent stems from his conviction that improved productivity will allow for faster, noninflationary growth. On Sept. 1, he explained to Business Week Fed watcher Laura Cohn his views on the New Economy and elaborated on his economic outlook. Here's an extended online-only version of the Q&A that appears in the Sept. 20 issue of Business Week:

Q: Why did you dissent on June 30?

A: It really didn't take a lot of personal courage because Alan Greenspan rarely beheads anybody. My position on some of the New Economy issues probably was the strongest in the group. So I'd be the logical one to go over that line.

Q: Why are you upbeat on productivity?

A: Behind my optimism is the last 3 1/2 years. We've had fairly rapid growth that has been supported both by faster-than-normal [growth in the number of] hours worked and by faster-than-normal productivity [growth]. We had a disappointment in the second quarter, but I'm hopeful that that was an aberration and not an indicator of a trend. I believe we're going through a very important technology revolution.

Q: Why does the Dallas Fed hold this view, while others don't?

A: It's happening all over the economy, but a bit more in our region. We've got a telecom corridor in north Dallas. It's a two-mile concentration of over 600 high-tech companies. And Austin is a hotbed of not only Dell Computer manufacturing but of software innovation. I believe the environment in Texas is more entrepreneurial. And certainly, growth in Texas has exceeded the national average every year since I've lived here. It's a vibrant, hot economy.

Q: How long can the U.S. grow at a 3%-plus rate without sparking higher prices?

A: I don't see anything that's going to cause a downturn. You could argue that our personal savings rate is too low. You could argue that our trade deficit is too large. You could argue we're relying too much on foreign capital. But those are not things that are likely to slow the economy very much.

Q: Why not?

A: While our personal savings rate has gone down, that's been partially offset by the government savings rate turning to a small positive. So national savings hasn't gone down nearly as much as personal savings.

Q: Do you worry about our status as a debtor nation?

A:I don't worry a lot about it. People who worry assume that we're buying more goods abroad than we're selling abroad and that we're having to finance that with a capital inflow. It's just as likely that the causation is working the other way and it's the capital inflow that's causing us to have the trade deficit. Until recently, our dollar has been very strong. The recent weakness in the dollar is a bit troublesome, but people exaggerate that because it's concentrated primarily in the yen. I don't think, looking at all our trading relationships, the dollar has weakened that much.

Q: How is your thinking about the U.S. economy colored by what's happening in Mexico?

A: Mexico is four times as important to the Texas economy as it is to the economy of the U.S. Mexico has been doing fairly well lately. The Mexicans' income and output are growing. During that period of very low oil prices, they were hurting. So much of their government revenue depends on exports of oil. This rebound in oil prices has helped them a lot. So I think Mexico is probably a slight source of strength to us now.

Q: Months ago, you said deflation abroad will damp U.S. prices. What about now?

A: It does appear that the Asian countries have bottomed out. And that does shift things just a little bit. We're no longer importing those deflationary forces. But on the other hand, we're not importing inflationary forces either.

Q: So what will the recovery overseas mean for the U.S. economy?

A: Maybe it will help us with our balance in our economy. We've got this huge trade deficit, to the extent that it did originate on the trade side was largely because we were the only strong economy, and all our trading partners were weak. So their regaining strength will hopefully turn around this deterioration in our trade balance.

Q: What else is reassuring to you about the U.S. economy?

A: We are very close to price stability. In the 1970s, if a company wanted to pass along higher costs as higher prices, they just did it because they knew all their competitors would too. But in this stable price environment, they can't do that. So they have to try harder to cut costs and become more efficient.

Q: What's your view on the role of the stock market in monetary policy?

A:I do not think it's appropriate for the Fed to set out to influence stock prices. Whether we think [they're] irrationally high or not, we really have to trust the collective judgment of stock buyers and sellers.

Q: When you introduced Alan Greenspan before he spoke in March, you said it takes courage not to tighten. What did you mean?

A: The central banks' main job is price stability. The tough thing to do is to take the punch bowl away. Over these many years, we've learned that [doing so] sometimes causes political problems. But it just became conventional wisdom that central banker courage meant the courage to tighten. I had never seen anybody point out that given that conventional wisdom, if you don't think you ought to be tightening and a lot of the rest of the world thinks you should be, the tables have turned and it takes courage then not to tighten.

I pointed out in that introduction that he showed the courage to tighten in 1994 with his pre-emptive policy. And in the last year or two, when a lot of conventional, Establishment economists thought that the Fed ought to be pre-emptively tight again, [yet Greenspan chose not to and instead tested] the growth limits of the New Economy, that took some courage. And because of that courage, nothing bad happened. The inflation rate didn't accelerate. And the unemployment rate kept going lower. And suddenly, we started getting improvements in the minority unemployment rate.

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