By John J. Edwards III
Everyone on Wall Street
that economic growth leads to inflation. But
doesn't buy it.
A frequent commentator on
, Levy, the chief economist at
NationsBanc Capital Markets
, has developed a strong reputation for pounding the table and declaring that inflationary problems are not likely to surface anytime soon. In 1994, as much of the market quailed in the wake of a batch of
rate hikes, Levy maintained that inflation would not emerge and bonds were a screaming buy. And he was correct. That scenario is repeating itself this year -- at least in terms of getting a Fed rate hike and Levy pleading that inflation isn't a problem.
Levy is part of a small and zealous Wall Street group that believes inflation stems from a lack of Fed vigilance rather than from an overdose of good news from Main Street. In 1995, Levy, emboldened by faith in his noninflationary vision, told
that inflation would fall toward 2% on an annualized basis in 1997. Instead inflation is at a tolerable -- but higher -- 3% this year. Still, he believes that a combination of well-modulated Federal Reserve policy and moderate inflation has created a new economic environment free of inflationary worry.
"Even though this expansion's old in age, it still seems young in character," he says. "And if the Fed is successful in pre-empting any rise in inflation, then you'll have such corrective mechanisms within the economy and the goods markets and the labor markets -- and the financial markets, of course -- that the economy will slow down and keep chugging long."
Not that Levy ascribes anything like infallibility to Fed Chairman
and his colleagues. Though the Fed's March 25 interest-rate hike was in line with a recommendation of the
Shadow Open Market Committee
, of which Levy is a member, Levy thinks the Fed is wrongly wedded to the conventional-wisdom economic approach. He says he went along only reluctantly with the SOMC's early-March recommendation of tightening, believing the economy would slow on its own.
"I can tell you that Alan Greenspan and the Fed have been surprised inflation's stayed low, because their framework hasn't worked," he says. "So rather than to say, 'Oh, gee, our framework's been wrong,' they say, 'It's just a matter of timing.
Inflation will come back.' Or they come up with these ad hoc analyses, like the insecure worker, which makes no sense at all."
Levy's own framework mixes a brash confidence with an acknowledgment of the limits of economics. For him, market psychology is the bugbear that turns the purer science of economics into a messier art.
"Of course what's painful in the market is, you can be right on inflation and generally right on how the economy works and still over periods of time be wrong on market interest rates," Levy says with a rueful grin. "Eventually the rates will reflect the fundamentals, but in the short run, it can be painful that everybody yells and screams at you."
Like many economists, Levy has been somewhat taken aback by the rapid real growth of the economy. In
The Wall Street Journal's
June 1996 survey of economists, Levy forecast full-year
growth of 2.4% and
Consumer Price Index
growth of 2.6%. The actual numbers came in at 3.1% and 3.2%, respectively.
But Levy is sticking to his guns, maintaining that inflation is still low by any measure. "I would argue strenuously that inflation's going to stay low -- which I've been completely right on -- and I would argue that bond yields are going to be way lower in the second half of the year," he says.
Slower economic growth
coming, he insists, and with it a return to 30-year Treasury bond yields under the psychologically important 7% level. "But right now, with the market badly vulnerable, there's no chance in the near term," he adds with a little laugh. By the end of the year, the long bond should yield 6.50%, he says: "It seems a far cry from here, but it'll get there."
The lanky and affable Levy honed his economic approach at the
American Enterprise Institute
think tank in Washington and the
Congressional Budget Office
before entering the private sector in the mid-1980s. He has little patience for some of his Wall Street compadres, whom he says take a lax and facile approach to the serious work of forecasting.
"I think it's important, rather than to kind of accept at face value some of these notions kicking around the market, analyze 'em," he says. "We did some work earlier on the 'discouraged worker' hypothesis that another economist on Wall Street was pushing, and that one -- that was an embarrassment. It made no sense at all."