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Fed Announces No Rate Hike for Now

Aired August 22, 2000 - 2:12 p.m. ET


NATALIE ALLEN, CNN ANCHOR: We should know any minute now whether the Federal Reserve Bank plans to raise interest rates. The central bank's Open Market Committee has been meeting in Washington to consider rate policy today. Most analysts expect the Fed to hold the line and perhaps issue the statement that it's still worried about inflation threats. Since June of last year, the Fed has raised rates six times to slow economic growth and keep inflation in check.

Joining us to talk about why rates are likely to remain for now and what inflation threats loom in the future is Robert Frick, senior editor of "Kiplinger's Personal Finance" magazine.

Thanks for being with us.


ALLEN: Everyone seems pretty confident about the outcome that they're expecting today, which is that the Fed's not going to do anything. Why is that?

FRICK: Well, it's a slam dunk. You've seen a number of reasons why the Fed wouldn't raise rates. I mean, primarily, you've seen things like consumer spending going down. And that's a big thing, because that's been heating up the economy like you can't believe. So that's going down. Oil prices seemed to have preaked -- peaked, rather. You have consumer prices at the wholesale level have basically gone nowhere in the last three months, so why would you want to raise rates?

ALLEN: Well, but people are still saying that if the Fed doesn't do anything, they'll probably send a message that there's still a risk of inflation. Where do those risks lie for the rest of the year?

FRICK: Well, if consumer spending does pick up, that could be a real problem. Also, you're seeing long-term interest rates are going up. So there's a real balancing act going on here. What exactly is going to happen, you know, nobody knows. But the Fed is very cautious. It's kind of like your mom wagging her finger at you and warning you, you know, don't get too out of control, don't drive too fast. And as long as they kind of keep the lid on, I think they feel much better about the situation.

ALLEN: Report here says unemployment rate is under seven percent, and that's a threshold currently believed to trigger inflation. So why hasn't that happened?

FRICK: Well, productivity is the thing that's off-setting unemployment. So when the productivity is so, so great right now with basically the new economy and the computer revolution, that keeps inflation down. As a matter of fact, nobody knows really the extent that it is keeping inflation down. And you could even argue that the Fed is ratcheting up rates too quickly. So as long as productivity gains remain strong, consumer spending remains kind of moderate and isn't increasing as it has, housing prices down, there's no, again, there's really no reason to raise rates.

ALLEN: Do you think there's anything political about the decision today, if the decision is to do nothing with interest rates, considering there's an election in just a few months?

FRICK: Well, it's kind of apolitical. I mean the Fed doesn't want to seem as though it's supporting one candidate or another. At least that's what you'd hope. We certainly hope that's the case. So politics enter into it to the extent that the Fed wants to stay out of them.

ALLEN: What is the next meeting that we could see something from the Fed as far as the remainder of the year?

FRICK: Well, well, they can always call a special session and they can, you know, jack-up rates any time they choose. But November, after the election, is their next scheduled meeting. We actually think there's a possibility that they might increase rates maybe a quarter of a point that time just as kind of a preemptory smack...

ALLEN: Just going to interrupt for a second. We've just learned that, as expected, the Fed has chosen not to change interest rates. So there we have what was expected. So continue, as far as the rest of this year.

FRICK: Well, I think November, again, there's a possibility you might see rates go up. On the other hand, long-term rates already are kind of edging up. So as a consumer, if you're thinking about buying a car or taking out a mortgage, don't hold your breath, don't wait for rates to come down just because they're not going up. Now if it suits your situation it's a good time.

ALLEN: Stay right there, we'll talk with you in just a moment, a little bit more Mr. Frick.

We're going to, right now, switch to Rhonda Schaffler. She's at the New York Stock Exchange. It's been kind of a wait and see day up until now -- Rhonda.


Well, at this point the market's still holding onto gains. As you pointed out, as expected, the Federal Reserve leaving interest rates unchanged. It's the second straight policy meeting the Fed has done that, after what had been six straight rate hikes going back to June of last year. As far as the reasons, that were widely expected from Wall Street that there would be no change in interest rates, is there's been a lot of economic reports out over the last couple of weeks that indicated the economy is growing at a less torrid pace, and at the same time, people were watching productivity gains and no signs of inflation; becoming a problem in some of those economic reports.

As far as the market's reaction to the Fed; right before the announcement, the Dow was up more than 80 points. You can see right now that it's up about 71. We're keeping a close watch on financial stocks, very interest-rate sensitive. J.P. Morgan on the Dow is currently up three. That's about where it was before the announcement was made. And the Nasdaq composite, right now, is up some 34 points.

Now in its commentary, the Fed did say it sees an inflation risk and it's concerned about the continued gap in supply and demand. Also, that productivity gains are raising the potential growth rate. These are similar themes that the Fed has stated in past statements. The decision to hold rates steady is seen as good news for consumers as well as some investors. When the Fed raises those short-term interest rates, banks and other lending institutions pass that rate hike onto consumers. Since last June, the prime lending rate to businesses and consumers has increased to 9 1/2 percent, it's a nine- year high. The previous rate was 7 3/4 percent.

Now going forward from here, one wildcard, that inflation- watchers are keeping an eye on, is oil. Gasoline and home heating prices have soared in recent weeks. And there's talk about what those prices will do as we head into the home heating season over the winter. That could be inflationary, others are saying if prices are on the increase, that would continue to put a damper on consumer spending. Because there's fewer disposal dollars for consumers to throw around. So that is going to be one of the debates going forward. The Dow, just to recap, is up 72 points.

That's the latest from Wall Street, we go back now to Atlanta.

ALLEN: All right, thanks Rhonda.

John Metaxas, watching the numbers at Nasdaq to see if there's an effect from this no-decision by the Fed today.

JOHN METAXAS, CNN CORRESPONDENT: Natalie, virtually no effect here at the Nasdaq. The Nasdaq, right now, up 32 points at 3985. It had been perched above 3990 just before the Fed announcement. So one might be tempted to think that it was waiting to cross the 4,000 level and then might do so after the announcement. But no such move. We've, in fact, we've pulled back a handful of points below 3990 here.

So evidently the consensus was right, and that number appears to have been built into the market. Really, no reaction whatsoever from the Nasdaq. Kind of a light trading day, again, still under a billion shares changing hands. You can see the trend, though, the Nasdaq has been positive the whole session, up about a percent right now. But really not that much commitment and really no movement after the Fed announcement. We are seeing a good day for the chip stocks, again, today. Intel up 1.6 percent. And Sun Microsystems up close to two dollars a share as well. Sun reaching a new 52-week high. Investors have tended to go into the blue chips the last couple of weeks here at the Nasdaq, feeling perhaps, that the well-known established companies are safer.

Today we're seeing a nice move in the financially-related companies at the Nasdaq, such as the mutual fund company T. Rowe Price, which is up 4 1/2 percent. One doesn't normally think of the technology stocks as being that financially related, interest rate- related, as say, the financial stocks. But there is a view out there that in a slowing economy, companies may need to buy more technology to boost their productivity. And that's seen as positive for the technology stocks going forward.

Natalie, back to you.

ALLEN: All right, John, thank you.

And now we're going to go to the Chicago Board of Trade and Lisa Leiter -- Lisa.


Well, there's been very little reaction in the Chicago bond pits to the Fed's very expected decision to leave interest rates unchanged and to maintain their bias toward raising interest rates in the future.

Right now, the 10-year note, which has really become the benchmark issue here, is now virtually unchanged, up just slightly. The yield, 5.77 percent, it's pretty much where it was before they made its decision. The longer end, the 30-year bond, is down just slightly. And traders say that's not unexpected considering how much that issue has rallied in expectation that the Fed wouldn't do anything. And the yield, the interest rate on the 30-year bond right now, is at 5.71 percent -- Natalie.

ALLEN: Lisa, thank you, back to our guest, Robert Frick, with "Kiplinger's Personal Finance" magazine.

You talked about that the Fed would likely send a signal about -- though, a warning about future inflation, and it has done that. So how do investors heed that warning?

FRICK: Well, if you look at the market too closely, I think you're going to go blind. I mean, this is a case of no news is good news. Let's not try and read the tea leaves too closely. The Fed does what it always does, it's cautionary. I can't remember the last time that Alan Greenspan came out with a release that said everything is great, everybody spend like crazy, nobody worry. So this is the kind of thing that...

ALLEN: Doesn't sound like his style. FRICK: No, no, but, when you think about it, is there ever a great time in the economy? does your mom ever say: Go as fast as you can? no, you know, she never does. So I think you really have to take this in context and just realize that it's never going to be great as far as the Fed's concerned. And actually, it is great. I mean, it's great, you know, let's enjoy it.

ALLEN: Right, one economist said the situation right now is as good as the Fed can expect it to get.

FRICK: Right.

ALLEN: So that's good note to end on. We'll just enjoy it for now. Thanks so much for helping us out today. We appreciate it.

FRICK: You're welcome.



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