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Fed Raises Interest Rates a Quarter Point

Aired March 21, 2000 - 2:14 p.m. ET


NATALIE ALLEN, CNN ANCHOR: We are awaiting the latest decision from the Federal Reserve on interest rates.

With us to explain what will probably and why, economist Donald Ratajczak, director of economic forecasting at Georgia State University. He joins us, well, pretty much as he always does now on a big Greenspan day. What are you expecting from Mr. Greenspan in just a moment?

DONALD RATAJCZAK, DIRECTOR, ECONOMIC FORECASTING CENTER, GEORGIA STATE UNIVERSITY: Oh, I think we're going to see another quarter point. The interesting thing won't be the action itself, but what the language surrounding the action will be. And we think it's still going to say that they are concerned and leave the door open for further rate increases.

ALLEN: There definitely seems to be a lot of inflationary pressures, but Greenspan keeps raising rates. So what is it with this economy that causes him to keep doing this?

RATAJCZAK: Well, of course, he's looking at the tightness of the labor market. And he's hearing that all around. People are saying it is hard to find talent.

ALLEN: We've just been told that it is up a quarter, to 6 percent now, so.

RATAJCZAK: OK, well, I'm glad I said that.

ALLEN: So again, what is it with this economy that he feels this is the best approach to take?

RATAJCZAK: Well, the economy is growing at about 4 percent and it's dropping unemployment rates. And that's a feeling -- that's a sign that 4 percent is too fast. Now, it may not be a lot too fast, but it is too fast. And ultimately, if you are driving this fast, with an economy with very little labor surplus in it, you start to get wage pressures and inflationary pressures. We have not seen that yet, but all economic theory says: "Look for it. It should show up."

ALLEN: We'll talk to you more in a minute. Right now, we're going to skip over to the New York Stock Exchange, Greg Clarkin, since we just received this news from the Fed -- Greg. GREG CLARKIN, CNN CORRESPONDENT: Hi, guys. You were mentioning the language that accompanies these Fed announcements. Now first, let me just say that really this was no surprise to anybody down here today at the NYSE. They were expecting a quarter-point rate increase. That's what they got. When the news crossed the wires here, there was a certain cheer that kind of went up. And a quarter point right in line with what they expected.

Now that said, the language accompanying this Fed increase today is saying -- the Fed is saying that they see pretty much the economic conditions the same as they back did in February: that is, when they last raised rates a quarter point. And at this point, they still say they do see excess supply could outstrip potential -- or excess demand could outstrip potential supply growth.

So, that basically is the wording. It's very, very similar to the last two statements from the Fed on the last two go-arounds when they hiked interest rates, so at this point the Fed really keeping door open for more interest rate increases.

Now that said, the Dow is up about 132 points. Right as the Fed raised these rates, or this news crossed the wire, right now the Dow is up 117 points. It really -- it dropped a little bit and then kind of this stabilized around 120. It's trading at 10,801.

Now, if we could also tell you that the Nasdaq composite has been under much different circumstances today. That has been lower throughout much of the day. The tech stocks really have been very volatile and mostly in the red. Right now, the Nasdaq is off an even two points, so not much action there.

Now, the expected quarter-point hike and its effect in the Treasury markets: We saw the bond trading up a quarter point in price with the yield at about 5.98 percent or so.

So, that's it here at the NYSE. We're seeing the Dow regaining some of the few points it lost on this news. It's up 128, 10,804.

Back to you in Atlanta.

ALLEN: All right, Greg, thank you. Some would say it is the Nasdaq that has been driving this stock market, perhaps even the economy.

Let's go to Susan Lisovicz. She's at the Nasdaq for more from there -- Susan.

SUSAN LISOVICZ, CNN CORRESPONDENT: Hi, Natalie. That's certainly a very fair statement. The Nasdaq and all of its tech stocks have been the vanguard of the bull market. In fact, the Nasdaq was up 85 1/2 percent last year, the best year ever for that index.

Now when you have that kind of upward momentum, the downside can be equally volatile. And that's what we've seen in recent weeks.

As far as today goes, there's always nervousness when the Federal Reserve is expected to make an interest rate hike, and you've seen that today. But it's not only that. You have to argue that what's happening here is a correction of sorts, because biotech sector, one of the strongest performing sectors of the Nasdaq, which had been up something like 81 percent earlier this year, got hit lard last week. Some comments from President Clinton that threatened, investors feel, could threaten some companies in that sector. They've sold off very heavily and dragged down many stocks with them.

The Nasdaq today down as much as 3 percent today, down 143 points. Right now, it's flipping in and out of positive territory. And I have to say, although certainly the trend is on the negative side, I'd have to echo Greg Clarkin's statement about the language of what the Federal Reserve says could determine what the Nasdaq does at closing bell.

Back to you, Natalie.

ALLEN: All right, Susan, thank you. Let's talk about that language: demand -- concern about demand outstripping supply, something you alluded to. What do you think about what you're hearing from the Fed?

RATAJCZAK: Well, I think the Federal Reserve is looking at the numbers, and they must have estimates similar to mine, which is basically that in the first quarter we continue to grow at a 4 percent rate. And clearly, the Federal Reserve finds that to be excessive.

So they'll -- they'll continue to put moderate restraint on. I think the odds now are in favor of another quarter-point move when they meet again in May. I'm not saying it's a done deal like this one was, but I think most of us economists are going to say another quarter point in May is the likely outcome.

ALLEN: The incremental approach, the gradual approach on his part? And when might we see the effects on the economy? How long will that take?

RATAJCZAK: Well, first of all, we certainly don't want him to get aggressive unless there's imminent danger. As we pointed out, there's the fear that the current economic performance will create inflation, but there isn't the reality, outside of oil, that inflation is showing up. Indeed last week's inflation numbers, once you took oil out of the equation, were quite modest indeed.

And so there's no need to say we must stop things now. So therefore, you don't make big moves.

On the other hand, you continue to make small moves until you see that the effects of those moves are starting to slow down the economy. At this point, there's no serious evidence that anything is slowing down. All the indicators still look pretty strong.

ALLEN: And if we can talk for just a moment about the stock markets a little more, some -- some suggest he's trying to rein in the stock market. What are your thoughts on that? RATAJCZAK: Well, he is concerned that the stock market is creating excess spending by the consumer. Now, I don't think the Federal Reserve has any business worrying one way or the other about the stock market in isolation. That's an auction market. Let people decide what they want to pay for any individual stocks.

But when it spills over so that consumers are going to spend more than they're earning -- and that basically is what's now starting to happen; consumers are spending more aggressively than they are earning, and therefore, they need to raise their debt, and their debt structure is starting to buildup -- that is a legitimate concern of the Federal Reserve. And that's how the start market comes in.

Why are they spending too much? Because they feel wealthy. Why are they wealthy? Because the stock market's up. Therefore, if somehow we can get some moderation in the market, maybe that would be beneficial: although I have to believe that we are starting to see some moderation. The stocks that have been left behind are starting to get some following and the stocks that have been way up there in the stratosphere are definitely stumbling a little bit at the present time. And I see this as a very healthy adjustment taken place.

ALLEN: Thank you, Donald. Let's go to the Chicago Board of Trade now. Ceci Rodgers is there watching to see what happened as a result of this announcement -- Ceci.

CECI RODGERS, CNN CORRESPONDENT: Hi, Natalie. Well, of course, as expected, the discount rate and the federal funds rate -- two key short-term rates controlled by the Federal Reserve -- were raised this afternoon a quarter of a percentage point. And the Federal Reserve signalled in its comments and its comments that it released after raising interest rates suggest that there is more to come.

Now, we're seeing a bit of relief in interest rates this afternoon, sort of counterintuitively. The 30 -- the yield on the 30- year benchmark Treasury and the 10-year Treasury note both down a little bit, even though the Fed has raised short-term interest rates.

And this may be sort of a positive sign that the markets feel that the Federal Reserve is on the job fighting inflation and is going to raise interest rates enough to cool off inflation and slow the economy just enough to keep this recovery going. It's kind of the best-case scenario that the markets seemed to be reacting to this afternoon -- Natalie.

ALLEN: All right, Ceci Rodgers, thank you.

Donald Ratajczak, one more for you. What will you be looking for as an economist extraordinaire in the next few months to check out this economy and the effects of Greenspan's moves?

RATAJCZAK: Well, of course, we want to see if indeed the interest rates are having a moderating effect upon the economy without really shutting it down. We don't want to go too far. On the other hand, we want to see what the inflation rates are truly doing once we go beyond the oil situation. And at the present time, I am a little concerned that the Fed may be stepping a little bit too far, because they're not factoring in the natural effect that higher oil prices are going to have upon containing spending.

So they're trying to contain spending and higher oil prices will start to contain spending. And if they both misjudge a little bit, we may slow it down a little bit more than would be desirable. That's my concern.

ALLEN: Donald Ratajczak, we'll keep in close contact with you. Thank you for joining us.

Again, the Fed raising interest rates a quarter point. That was expected. And we'll keep following along what happens in the market today and throughout the week.

We'll take a break. More news in just a moment.



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