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Fed Holds Interest Rates Steady, Changes Policy Stance

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LOU WATERS, CNN ANCHOR: And we've gotten our announcement from the Fed this afternoon. Interest rates remain unchanged, the inflation alert is off. But look ahead now: The central bank warns the economy is slowing so fast there is a risk now of a downturn. That may signal a rate cut at the next Fed meeting. It's scheduled for January.

Jeffrey Rosensweig is an associate dean of the business school at Emory University. Professor Rosensweig, they did what you said they were going to do, keep the rates the same. But you get every indication that probably they would like to have cut the rates today, but it was politically impossible to do so.

JEFF ROSENSWEIG, GOIZUETA BUSINESS SCHOOL: Sometimes you wish your forecast is wrong, but I knew Greenspan couldn't cut today. He's a Republican. He just met with the Republican president-elect. The most important thing for the Fed is their independence, their political independence. But he sure showed a lot of leg, didn't he? He realized, that, oh, we're leaning toward ease, we're worried about the economy.

We could see the action we're looking for in January. That's why the stock market did a U-shape, if you noticed. A couple minutes after the disappointing announcement, although the one we predicted, all of a sudden the stock market was down a lot, because we need that rate cut. But then it's already working its way back up, because I think people saw Greenspan, as I said, showing a lot of leg, like "We'll do it in January if we need it."

They may do it before their meeting.

WATERS: I don't think I've ever heard anyone say that Alan Greenspan showed a lot of leg before.

ROSENSWEIG: Not a very pleasing prospect, but he's done a great job with the economy.

WATERS: But then you have this image of the White House today, you have President Clinton, in effect, taking exception with George W. Bush and his vice president-elect's, Dick Cheney's, assessment, we're near a recession. Are we or aren't we?

ROSENSWEIG: We're very near. You know, the problem with statistics, they look backwards. I try to look forward when I talk to business people all the time. That's why I'm at a business school.

There's some -- there's some pain out there, and there's going to be a lot more pain after Christmas. There's going to be a lot of layoffs in the retail sector, the manufacturing sector.

We better hope for good weather this weekend coming up. It's the last hurrah for a lot of retailers if they don't pick up their holiday sales. Right now it's dismal.

WATERS: So is this what was feared? A train wreck? Isn't this what the Fed designed from the very beginning?

ROSENSWEIG: Well, they tried to design a soft landing, and so far, they've pulled it off masterfully, but we're bumping that runway pretty hard. It's going to be awfully hard for some folks looking for jobs in January.

Again, Clinton and others -- we're talking about the unemployment rate. That's kind of a backward-looking indicator.

I think we're going to feel some layoffs. We felt some yesterday. If firms are laying people off before Christmas, which, let's face it, is a pretty cruel thing to do -- laying off people before Christmas -- think what's going to happen after Christmas.

Looking forward, we're hitting hard. We're not going to have a hard landing. Again, the reason I said Greenspan showed his hand today is he's not going to allow a hard landing. He'll be fairly aggressive about interest rate cuts pretty soon.

WATERS: And when you look ahead, you've got to look to George W. Bush keeping with his campaign promise to lower tax rates, and of course, the Fed has to take that into account.

ROSENSWEIG: And that's the reason they didn't play their card today. I think they're saying to Bush, we can't have both. We can step on the accelerator or you can step on the accelerator with tax cuts. If we both do it, we're back into that world we were worried about a year ago, when people were getting too euphoric, too frothy, markets were going up too high, we were buying too much.

So they're saying -- and I agree with them -- hey, we'll give the interest rate cut if you stay cool. We can only get one. I'd rather get the interest rate cut. It's much better for business to have the low interest rates. It's better for homeowners.

I think we're going to have to tell Bush some targeted things -- a little estate tax relief, marriage tax penalty relief -- we need some of that. The 1.3 trillion, I think, will be off the table. And if they try to persist with it, Greenspan is tough enough to say, no interest rate cuts and you'll be responsible for this economy.

WATERS: So if you're Alan Greenspan, what do you do now?

ROSENSWEIG: If you're Alan Greenspan, you wait the minimum amount of time you can proving your political independence, and then you're ready to come in even with what's called a 50 basis point interest rate cut. He's an incrementalist by nature, though, as I was speaking about with Joie 90 minutes ago.

But we might need something pretty firm. It would be a surprise, in terms of they usually wait for their meeting, but their meeting isn't until the very end of January, practically February. If you're Alan Greenspan, you've got your foot on the accelerator and you're waiting in early January to see if all the e-tailers, probably other than Amazon, are going under, if we're seeing massive layoffs. And you surprise the markets with a 50 basis point cut to say, at the Fed, we are not looking for a hard landing. We tried to engineer a soft landing. We think we've done it, but we're not going to see this baby go into a recession.

There's going to be way too many layoffs if they're not aggressive in early January.

WATERS: Does Greenspan stay on?

ROSENSWEIG: Greenspan stays on. Greenspan is a -- if I may say -- he's a brilliant economist, but he's also a political animal. He'll do what it takes.

Again, he's a Republican, so he'll want to see Bush do well. There's misnomer out there. You read it in the papers that some of Bush's folks don't like Greenspan because he held monetary policy too tight during his father's era. Do you know he cut interest rates over 20 times during the first George Bush administration? He was doing what he could to keep George Bush in there. It was just a little bit too little. Again, he was too much of a gradualist. And that's why this time I think he'll be more aggressive.

But believe me, the markets would really sell off if we didn't think Greenspan was staying on. We still trust him, but I hope he's wide awake right after New Year's.

WATERS: All right, Jeff Rosensweig, from Emory University. Thanks again so much for helping us understand the story.

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