NEW YORK (Reuters) - The U.S. economy risks a sustained period of falling prices, the chief executive of Loews Corp, the conglomerate whose businesses range from insurance to energy, said on Wednesday.
James Tisch, who is also a member of the New York Federal Reserve Bank’s board of directors, in an interview with Reuters said the economy is struggling to recover, with the high levels of debt taken on before the financial crisis still curbing demand for credit.
Tisch said he sees reduced prices in a number of Loews’ businesses, which include CNA Financial Corp, Diamond Offshore Drilling, and Loews Hotels. He mentioned, for example, a decline in prices per unit of insurance, in daily rates for oil rigs, and in hotel revenues per available room.
“I think deflation is a real risk for our economy,” he said.
Deflation can become a dangerous spiral as falling prices and wages deter consumers from spending and the relative value of debt rises, making it even more difficult to pay off.
As a director on a regional Fed board, Tisch offers an anecdotal view of the economy to policy makers, which feeds into their decisions. A Fed director has no direct voice on monetary policy.
Minutes from the Federal Reserve’s June meeting, to be released later on Wednesday, are expected to show a more pessimistic outlook for the economy. They could also reveal an increasingly divided Fed, as some members push for a lively discussion of options for renewed easing measures to stimulate the economy but others argue against further use of unorthodox measures such as asset purchases.
“There is no doubt in my mind that they are thinking an awful lot about it and trying to figure out what they should do should that occur,” Tisch said.
“I‘m sure somewhere in their files they have documents on lessons learnt from the Japanese experience with deflation over the last two decades.”
Tisch said in his view the sluggishness of the U.S. recovery is partly due to the country having been been through a depression rather than a severe recession after the economy “basically collapsed” under too much debt.
“We are not getting the bounce off the bottom we would get after a recession. At the bottom of a recession banks extend credit,” he said. “But banks are not really extending credit, probably because there is not much demand for credit in the first place because people are so filled up with debt.”
But Tisch said his grim view of the U.S. economy does not mean he thinks the Fed should keep rates near zero percent, where they have been since December 2008. In his view, interest rates at zero deter savers and could lead to the creation of market bubbles.
Tisch said he agrees with the view of Kansas City Federal Reserve Bank President Thomas Hoenig that the benchmark U.S. interest rate should be raised to 1 percent soon.
“In terms of economic activity there is not a big difference between zero and 1 percent, but in terms of saver psychology there is,” Tisch said. “Rewarding savers is not such a terrible thing.”
“By having a 1 percent interest rate, it may tame some of the excess investment that’s going on that may lead to bubbles.”
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