WASHINGTON -- The odds that the U.S. Federal Reserve will raise interest rates in September are about even, says Alan Blinder, the Princeton University economist who served as vice chairman of the Fed in the mid-1990s.
Edited excerpts from Blinder's recent interview with The Nikkei follow.
Q: How do you view the state of the U.S. economy and labor market?
A: Well, actually, those two are quite different because of the absolutely terrible performance of productivity, which I've written about in The Wall Street Journal.
In terms of GDP, [we have] that negative first quarter and what's coming in to look like kind of a mediocre second quarter.
In any case, it will be a very weak first half in terms of GDP, but it may look much better in terms of jobs and unemployment. That's been true throughout the whole recovery because productivity has been so bad that even what we would have called trend GDP growth -- about 2 1/4 [percent] per annum is the average over the whole recovery -- has brought the unemployment rate down from 10% to 5 1/2.
Q: So how would you assess labor market conditions?
A: I think a reasonable conclusion is we're getting close to the neighborhood of full employment but we haven't got there yet. And that's ... the view of the majority of the FOMC (Federal Open Market Committee). There are some members of the FOMC, often called the hawks, who believe we're already completely back to full employment.
Q: The FOMC expects that inflation will remain at a low level in the near term. Do you agree with its view?
A: It looks that way if you ... look at the trailing 12-month average, which is what I always look at. Both CPI (consumer price index) core inflation and PCE (personal consumption expenditures) core inflation have been absolutely steady for a while now.
Q: Is the strong dollar damaging the economy?
A: Yes, it is. But it's easy to overstate the damage. One has to remember that U.S. exports are only around 12-13% of GDP. The other 88%, 87% is purely domestic. So yes, [the strong dollar] is relevant [to the economy]. But to me, it's hard to get more than, say, a half a percentage point of growth disappearing into the exchange rate hole.
Now, that's not trivial. The difference between 1 1/2 and 2 [percent] or between 2 and 2 1/2 [is] enough to matter but not enough to dramatically change your whole outlook about how healthy the economy looks.
Q: The FOMC seems quite divided on the timing of a rate hike, but the majority in the markets expect September. How do you think Chair Yellen and FOMC members see the main scenario?
A: Well, they're confident that GDP growth will improve from the horrible first quarter. But they're wondering about how much it will improve. If it only improves to -- let's just make up a number -- 1 1/2 or 2 [percent for the remaining three quarters], I don't think they'll be too anxious to be raising interest rates.
On the other hand, if ... it improves to something well above 2 or maybe even 3, that will certainly strongly encourage an increase in interest rates.
People in the markets want the Fed to tell them what the Fed is going to do. When the Fed itself doesn't know, that's pretty impossible.
Even if we pretended that Janet Yellen was going to make this decision all by herself, which is not the case, there's still a lot of uncertainty about it, and it's captured in this phrase, "data dependent."
Q: Do you feel that September is a possibility?
A: This is just a guess, and it's largely a guess on what the incoming data will look like -- I personally feel [the odds of a rate hike are] pretty close to 50-50 between September and December. The Fed will have a lot more [data] to go on by the time of the September meeting. ... to me it's pretty close to a coin flick between September and December.
Interviewed by Nikkei staff writer Toshiki Yazawa