Brewbaker questions
need for Fed rate cutThe Bank of Hawaii economist was
on a committee that met with Federal
Reserve board governors this week
Bank of Hawaii economist Paul Brewbaker believes the U.S. economy has enough stimulus that it doesn't need an additional interest rate cut and he told the Federal Reserve board governors that at a meeting this week.
But he said another such move by Chairman Alan Greenspan and company would be "icing on the cake" for Hawaii.
Brewbaker was part of an 11-member American Bankers Association economic advisory committee that unanimously predicted this week the Fed will cut the federal funds rate to 1 percent or lower at Wednesday's Federal Open Market Committee meeting.
He also was one of seven panelists who said the rate cut wasn't necessary. Nonetheless, Brewbaker joined five other economists in predicting the Fed will cut the rate a quarter percentage point. The other five panelists forecast a reduction of 50 basis points. The economists were in Washington, D.C., to provide the ABA's semiannual forecast for the U.S. economy, and to meet with the governors of the Federal Reserve board.
"Hawaii is in a very different kind of parallel universe," Brewbaker said yesterday from his Washington, D.C., hotel. "The U.S. has 6 percent unemployment. Hawaii has less than 4 percent. U.S. real GDP growth is 2 percent. Hawaii's growth is more than 4 percent. The U.S. needs stimulus, but we don't."
Brewbaker said the opinion of the majority of panelists is that the economy already has received enough of an infusion from three different catalysts. He cited lower interest rates from the Fed's previous reductions, the most recent federal tax cuts, and the depreciation of the dollar against the euro in the last year.
"Those forces are already at work to bring some economic momentum back," Brewbaker said.
Brewbaker noted, though, that the markets are anticipating yet another rate cut based on their interpretation of speeches from Fed governors in recent weeks, and the statement from the FOMC after the May meeting suggesting the Fed is concerned about deflation and may want to take out additional insurance.
"The opinion of the (economic advisory) committee is that the risk of actual deflation is minimal," Brewbaker said. "We don't disagree that there's potential risk, but we nonetheless agree that there's plenty of stimulus already there."
Brewbaker said geopolitical issues stemming from the war on terrorism, a weak global economy, and lagging business confidence from companies not yet ready to ramp up capital spending all could impede the U.S. recovery. He said that if the Fed cuts rates by a quarter-percentage point to 1 percent, it would have little ammunition remaining in case something unforeseen comes up.
Still, he acknowledged the Fed faces a dilemma because the recovery hasn't been even across the country.
"You can make the argument that Hawaii is the best state in terms of economic growth, maybe even job growth," Brewbaker said.
"There are pockets of growth in the U.S. economy. Southern California seems to be a relatively strong region but, in contrast, the Pacific Northwest and Northern California are weaker or as weak as the national norm. It's that pattern of unevenness that makes it difficult to arrive at a uniform policy recommendation."
For once, though, Brewbaker said it's nice to see that Hawaii is in the driver's seat as far as a recovery is concerned.
"It's the flip side of (the state) having not participated in a strong U.S. expansion in the late 1990s," Brewbaker said. "I think Hawaii will continue to experience relatively strong growth. I don't see that much of an acceleration in Hawaii. We're kind of in a state of steady growth. It's the U.S. that's going to be catching up to Hawaii in the next several quarters."