Ethan Harris
Ethan Harris
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The best tack is to move by a quarter point, with the promise that there will be more cuts to come if the economy remains weak. You can't maintain that promise with big bulky rate cuts.
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The adjustment to higher prices has been fairly orderly. It's not a 70's style shock. Oil prices do have an effect on the economy but it's not dramatic. It's a problem but not at the top of the list.
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There's this alternative scenario where the financial crisis starts to bleed into the economy in a major way,
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What's happened between now and then is that we've accomplished everything we've set out to achieve, ... Then they were trying to get the economy to the state it is in now, so the attitude now is, 'lets not screw anything up.'
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The national economy usually weathers these storms with relatively minor damage. Second, the hurricane is a 'supply shock' -- a disruption to productive potential -- not a 'demand shock.' The same factors that threaten growth -- higher commodity prices, shipping bottlenecks, reduced local productive capacity -- also threaten inflation.
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The one thing that companies can do quickly without laying people off is reduce the number of hours per week; as the economy slows, that's the natural place for a company to cut back. It's a little harder to pull back quickly on job hiring.
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Are the economic indicators looking like a recession? Absolutely. But you can still hold out hope that the war is resolved in a month or so and the economy can stage some kind of recovery.
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You're not talking about a full-blown business-cycle recovery here, which is something like 6 percent GDP growth for a year. To get that, you'll need the whole economy operating in full-growth mode, and clearly the consumer isn't.
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This is a sector that should be one of the engines of growth and should keep the economy healthy in the face of the weakening housing market.
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The surplus creates an environment where there's a tremendous amount of saving being freed up for private investment every time the government pays down its debt, that frees funds to flow into private investments. That has created this strong growth economy that we have.
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If we have an economy that functions O.K., with a little help from the Fed, in that case gridlock is quite good for the market,
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Obviously we have a pretty weak economy and this was not unexpected. We knew they were going to have to revise it downward.
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Even with a resolution to the situation in Iraq, the economy will still be suffering from some fairly significant headwinds.
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Even with a positive outcome in the war, the economy is going to have lost a lot of momentum by the time it's over. We're not going to see a few weeks of weak data -- we'll see a few months of weak data.