McTeer: The Enemy Inflation Is Knocking on Our Door

by Dina Temple-Raston
USA TODAY
May 10, 2000

In the fourth of a series of interviews with Federal Reserve officials, Dallas Federal Reserve Bank President Robert McTeer spoke this week with USA TODAY economics reporter Dina Temple-Raston about the downside of rising interest rates and the danger of inflation. Twice last year, McTeer was the lone vote on the Federal Open Market Committee against raising interest rates. This year, he is not a voting member.

Consumer price index troubling

Q: Some people don't understand why the Fed wants to slow the economy and maybe whittle down the number of jobs. What can you say to them?
A: Personally, I don't want to slow the economy down, and I don't want unemployment to be any higher than it has to be. On the other hand, I agree with everybody else (at the Fed). I don't want inflation to flare up because low inflation is the healthiest environment.

I think the best analogy is a race car driver. Race cars have brakes. Now why would a race car have brakes? Obviously, it is not to slow down the average speed, it is to help you take the curves and the corners so your average speed can be higher. My colleagues at the Fed and I want the expansion to remain sustainable, we don't want to blow the lid off and slip into recession.

Q: How do we know the enemy, inflation, has arrived?
A: In March, the core inflation rate (in the consumer price index) was up 0.4%. Maybe that will be temporary. But I would put it this way: The enemy is knocking on our door.

Q: What is the most disturbing economic number you've seen?
A: The worst numbers I have seen are the March (consumer price index) numbers. The trade deficit and the current account deficit are very, very large, and they pose a potential problem, but I don't see them as a problem yet. Because of the strength of the U.S. economy, we're importing more than we're exporting. But the attractiveness of the U.S. as an investment location is making foreigners more than willing to put in the necessary money to finance that trade deficit.

Q: Is the run-up in financial markets frightening to central bankers?
A: When the Nasdaq went up 87% in 1999, I wouldn't call it scary, it was amazing. I don't want to leave the impression that I know what (the stock markets' level) ought to be because I don't, though it did look like an awfully unsustainable thing to have happen. Clearly, a lot of something, I guess it was air, has gone out of it.

I do believe we're in a new paradigm. We're in a new economy, and we shouldn't expect all the old stock valuation rules apply to the new economy. But that doesn't mean the sky's the limit, either. The markets are a lot closer to earth than they were.

Q: Do rising wages necessarily mean inflation?
A: Wages are key in the economy. When wages start leading to costs rising more rapidly, if you have tight labor markets and very little excess capacity in the economy, it is very likely to be inflationary. On the other hand, if productivity is keeping up, then wages can rise pretty fast without it leading to higher unit labor costs.

Q: Did the fact that productivity rose a less-than-expected 2.4% last quarter worry you in that respect then?
A: Well, everyone focused on the 2.4% number. Nobody said anything about adding five-tenths to the fourth quarter. You know the fourth quarter they were saying (productivity rose at) a 6.4% (annualized rate). Then it was revised as 6.9%. If you look at a graph of quarterly productivity numbers, it is not smooth. There are usually a couple of big ones followed by a little one.

Remember last year, the second-quarter (productivity) number was kind of weak, and people were saying maybe (this productivity boom) is over with. Then we had two fantastic quarters in the second half.

It wasn't but a few months that I thought I was being daring when I said productivity could go as fast as 3%, and when I was saying it, thinking I was being daring, the economy was already doing it. In many ways, productivity growth is even better than those numbers indicate. Productivity is great, the numbers are great and the reality is probably even better than the numbers.

Q: How does the Dallas Fed's role differ from that of the other 11 regional Fed banks?
A: In terms of keeping up with the economy here at the Dallas Fed, we're probably a little more interested in the oil business than some of the others. We've kept up a little bit more with Mexico and Latin America more than the others. Those are two things based on geography. We're a little more active in economic education than some of them.

Dallas Fed President Relies on Folksy Wisdom

Federal Reserve Bank of Dallas President Robert McTeer fancies himself a modern day Claude Frédéric Bastiat, the 19th century French pamphleteer who, among other things, tried to explain economics to the masses.

"He's my hero," said McTeer, 57, in an interview. "He wasn't on the leading edge of economics, but he used satire to explain the fundamentals of the economy. I'm not a brilliant economist, I don't do mathematical models, but I'd like to follow in his footsteps."

Bastiat, like McTeer, was a bit of a maverick. A delegate to the French Assembly, he wrote satires about government regulation, including one that called on the French parliament to pass a law requiring citizens to close their curtains because sunlight had become unfair competition for candlestick makers.

"It sounds ridiculous, but it is exactly what they argue when they argue for protectionism," says McTeer, who has been an advocate for a more laissez-faire monetary policy.

He was the only member of the Federal Open Market Committee to vote against raising interest rates last summer, arguing the economy's productivity gains would offset the inflationary impulses tight labor markets might spark. Needless to say, McTeer, like Bastiat, was outvoted. The Fed has raised the overnight lending rate in five quarter-point increments since June in a bid to prevent the U.S. economy from overheating.

Though McTeer says he hasn't felt pressure to vote with his Fed colleagues, privately some members grumble that his dissension runs counter to the central bank's corporate culture, making the FOMC process seem more acrimonious than it is.

What's more, McTeer's folksy way of making a point goes against the staid grain of the institution. In many ways, McTeer is speaking from a childhood that reads like a Faulkner novel: He picked cotton, worked at his father's truck stop and says his only memory of his boyhood home in Ranger, Ga., was returning from school one day and discovering it was missing.

"I had forgotten that it was to be moved that day about a quarter-mile up the road," he says. "I think of that house and the way it grew over time as a metaphor for income growth."

From those humble beginnings, McTeer went to the University of Georgia and received a Ph.D. in economics before joining the Federal Reserve Bank of Richmond, Va., in 1968 as an economist. He took the top spot at the Dallas Fed in 1991. He is married and has two grown sons.

Bob McTeer