The stock market already is richly valued, which means that any kind of perceived change in the stance of monetary policy could have huge ripple effects throughout the market, which could be devastating. The wealth effect that the (rising) stock market has engendered has been a significant factor behind increases in consumer spending that we have seen.
Do you think that there's a risk of a recession in the near term?
Typically, recessions are caused by overheating in the economy and a rapid increase in interest rates. It does not appear that we are at that point in the economic cycle, where we are close to a sizable outbreak of inflation and a Federal Reserve (rate) tightening.
Perhaps the greatest risk that we might face is one of stagflation, where the Federal Reserve is caught between the conflict of its two goals. In other words, it has the very difficult choice to make between raising interest rates, which would be needed to fight inflation, or lower interest rates, which would be needed to sustain the economic recovery and reduce unemployment. Right now, low inflation means that the Fed can focus solely on unemployment, but the picture could rapidly change if its goals are pointing it in different directions.
You expect the economy will be growing at a 3 percent rate a year from now. But it contracted during the first quarter of this year. Why has it been so uneven?
I think it will continue to be volatile, and this is still going to be a recovery that is largely consumer-led. At some point, households will need to save larger amounts of their incomes. We had argued that that was the case before the recession -- that Americans needed to save more for retirement. The recession derailed that objective. The recovery started with the message that, yes, we want Americans to save more -- but not right now. That continues to be very much the message.