ECRI's Lakshman Achuthan on NBR

Lakshman spoke with the Nightly Business Report's Susie Gharib about the impact from oil price spikes and other shocks on the economy, and monetary policy going forward.

Read the Full Transcript of the Interview.

One On One With Lakshman Achuthan of the Economic Cycle Research Institute.

SUSIE GHARIB: Oil prices dropped today, closing at the $75 level. But our guest tonight says high oil prices are still quote dangerous for the U.S. economy. Joining us now to explain, Lakshman Achuthin, economist with the Economic Cycle Research Institute. Hi Lakshman..

LAKSHMAN ACHUTHAN, MANAGING DIRECTOR, ECONOMIC CYCLE RESEARCH INSTITUTE: Hi, Susie..

GHARIB: Tell us what you mean that high oil prices are a risk for the economy..

ACHUTHAN: Well, it really has to do with where we are in the economic cycle. We are in the fifth year of expansion, but the economy is down shifting. Specifically the growth rate of the economy is actually beginning to recede a bit, still positive, but receding. And this means that essentially you don`t have the momentum that you had, for example, last year, when oil prices first started to spike. And without that momentum, the economy is more vulnerable to negative shocks like high oil prices.

GHARIB: So are you saying that a year ago $80 oil, for example, would have been less of a risk than right now having it, hitting that price level?

ACHUTHAN: Absolutely. It`s really -- you could think of it like a window of vulnerability has opened up in 2006 that we didn`t have open in 2005 and I`m afraid that some people may have learned from 2005 that this economy can just take anything that`s thrown at it. And I believe it can take a lot being thrown at it as long as it`s in this cyclical upswing. Now we have a bit of a softening ahead of us, a cyclical downturn in growth. So the same type of shock that we had last year can do a lot more damage this year.

GHARIB: Some people say that, you know, oil is not trading based on fundamentals, that it`s trading on other issues, whether it`s about fear of terrorism, fear of hurricanes. When do you think that oil prices will accurately reflect supply/demand issues?

ACHUTHAN: Well, I mean, to some degree, they may be reflecting them right now where there`s all this concern about potential disruptions to supply. And that`s, I think, what we mean by this risk premium that`s in there because of all the geopolitical concerns and hurricane or weather concerns and what not. I do think looking at leading indicators, looking ahead not an the economy now but looking forward, around the world, particularly at the industrial sector globally, that there is going to be slower growth ahead and if can see this geopolitical issue in the Middle East begin to draw to a close -- and there was some suggestions that we`re seeing some light at the end of the tunnel -- then I think you get the focus back on where is demand headed and that looks like it`s heading a little softer at this point.

GHARIB: As you know Lakshman, Ben Bernanke is going to be testifying in front of Congress this week, Wednesday and Thursday. Do you think that these geopolitical concerns that you`re talking about accompanied with high prices of oil are going to be a factor in the Fed holding off from raising interest rates when they meet in August?

ACHUTHAN: Well, I certainly this is in the -- you know, on the side of the equation suggesting or arguing that you would want to hold off. This is being balanced and we`ll hear about this during his testimony in Washington, about... It`s being balanced against this vigilance against inflation. You have high oil prices. You`re going to see the PPI, the producer price index and the consumer price index probably come in a little higher in the latest reading. Even though they`re coincident, that will impact peoples` fears about where things are headed in the future. So you`ll have to probably hear from the Fed something along the lines of we`re very vigilant against inflation, but we reserve the right to move quickly if we need to if we so this economy slowing down too much.

GHARIB: History shows that when the Federal Reserve raises interest rates at a time when oil prices are spiking that it leads to a recession. This has happened many times in the past. Do you think that Ben Bernanke could end up making the same mistake as many of his predecessors?

ACHUTHAN: It`s possible. I mean, to be fair, last year we had oil prices rising and rising interest rates and we didn`t get a recession. This time around, I think that is a risk, but I think Mr. Bernanke is a good student of history and for example, he`s very well aware of what happened in the mid-`90s where we had a slowdown in `95 and then-Chairman Alan Greenspan essentially said, even if CPI comes in stronger, I`m willing to go the other way in order to keep this expansion going. In retrospect, we know that that was the foundation for the boom of the late `90s. So one can hope, at least.

GHARIB: All right, thank you so much, Lakshman, we appreciate your thoughts as always.

ACHUTHAN: Thanks for having me.

GHARIB: We`ve been speaking with Lakshman Achuthan of the Economic Cycle Research Institute.