Ethan Harris
Ethan Harris
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The basic story of the consumer is that he's OK in the near term and at risk in the medium term.
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The Fed is going to have a bias to be very easy in terms of policy, not just in the next couple of months, but well into the future.
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The third quarter was the sweet spot for profits from an economic perspective. You had this pickup in growth, but you didn't have the pickup in costs. In terms of growth, this is the best quarter we're going to see.
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You don't want to force the new chairman to open his term by having to make a a 50 basis point rate hike.
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They're adding to the intellectual firepower of the board of governors in terms of regulatory and financial markets issues, but initially they won't be important players in the monetary policy front.
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In terms of being a predictor for the national index, the Chicago number has a spotty record.
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We've been trying to see whether the improvement of the economy and financial market will carry the day in terms of consumer confidence, or if worries about labor will dominate. It looks like the 'glass-half-full' view is winning.
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In an ideal world, three simultaneous gradual adjustments would happen. The U.S. eliminates the budget deficit, China revalues by 30 percent and China works to rebalance growth more to consumption and less to exports. Of course none of this will happen and the pressure for protectionism from Congress grows.
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It's not as friendly as some of the other inflation numbers, but it's just one indicator. We have no inflation warning signals from any of the other major inflation indicators.
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It's not a question of a sudden explosion in prices. It's more an erosion of the low-inflation psychology.
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Everyone is all zeroed in on the consumer now, but the truth is that the consumer isn't the driver now. Confidence is picking up, but still at average levels. Wage growth is slow and the bulk of the tax cut is already in place. Finally, with all the debt people have taken out over the past several years the burden of paying monthly bills is leaving less for discretionary spending.
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The bond market went into this report looking for disaster. I think there's a sense of relief in the bond market.
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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.