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Federal Reserve Cuts Interest Rates

Aired January 3, 2001 - 1:31 p.m. ET


LOU WATERS, CNN ANCHOR: We have a significant economic story to report: the Fed lowering the interest rates by a half-point. And look at the Big Board: the Dow Jones industrials up 318, Nasdaq up 197.

And we have CNN's Myron Kandel with us.

Myron, was it only yesterday we were talking about the possibility of the Fed lowering those interest rates before their regular meeting in January?


I must, today's action was a big surprise, coming as it did today. Some people thought it might come before the Fed met at the end the month. But they were talking about possibly Friday. So today was a total surprise. And, by the way, we just saw the Dow Jones industrial average up on the board at the New York Stock Exchange.

Before that announcement came out, the Dow is down a handful of points. And now, in just a few minutes, it's up more than 300. So, obviously, Wall Street likes very much what the Fed did today. And the rest of the country probably should do -- should feel the same way. What the Fed has done is taken a strong preemptive move to avoid the possibility of the economy falling into recession. We know the economy was slowing.

There were differing views on whether it was going to slow enough to go into recession, or whether it was going to be a hard landing or a soft landing. The Fed is obviously worried that it was going to be a hard landing. And, therefore, it cut interest rates sharply: a half a percentage point. It usually moves a quarter of a percentage point. So this move, in between regularly scheduled meetings, of a half a percentage point, is a big and surprising move by the Fed. And it should translate into other aspects of the economy that will make borrowing money less expensive, both for individuals and for corporations.

It will bring down mortgage rates for home buying, and should certainly give the economy a shot in the arm, Lou.

WATERS: Mike, my question is: Since these economic indicators were very apparent during the holidays, and because Dick Cheney was going on the Sunday talk shows saying, "We're worried about recession," why didn't the Fed lower the rates when they met just a couple of weeks ago?

KANDEL: Well, you know -- but what the Fed did is, it moved its bias -- worry about inflation all the way to worry about a slowdown in the economy. A move to cut rates at that time would have been a surprise, because the Fed under Alan Greenspan is rather deliberative. It doesn't make big dramatic moves. However, having said that, what it did today is a big dramatic move, Lou.

WATERS: Was it also a political -- was there a political element in all of this, what with George W. Bush becoming president-elect and having this meeting with Alan Greenspan just before that Fed decision?

KANDEL: Well, you know, the Fed is an independent agency. Obviously, it is not totally isolated from political trends. I think the fact is that the Fed looks at the economic figures. It also -- let my digress just a bit -- don't forget George W. Bush is in favor of a big tax cut. The Fed doesn't like that big a tax cut. But a slowing economy would have given the administration more ammunition for one. So this may be a preemptive strike, both to head off a recession and also to head off a really sweeping tax cut, Lou.

WATERS: Is there anything long term about any all of this, Mike?

KANDEL: Well, it is -- there are some people who feel that even this surprise move of the a half-a-point cut won't be last, and that we will see more. It really depends on the state of the economy. We're going to get the first real view of what the economy did in December, when we get the employment figures out on Friday. And that will show what the jobless rate is, the amount of creation of new jobs. And that'll give us a clue to how -- really how much the economy really slowed.

So I think that it depends on those economic figures that will get out starting on Friday to know how much the economy has really slowed and whether we can expect another move by the Fed anytime soon.

WATERS: Thanks, Mike -- Myron Kandel in New York. Long term or not, it certainly is good news today -- Natalie.

NATALIE ALLEN, CNN ANCHOR: Absolutely. As you can see there, the Dow is now up 347 points. In fact, we just made a graphic here to show you -- I'm not sure what it is showing. That is where we started with the Dow -- Is that right? -- today.

WATERS: This is when the decision made about the interest rates, I assume.

ALLEN: There you go. And that is where the Dow has gone since then. You can tell my cold graphic reading is not very good. But that's how -- that shows you how quickly the Dow has shot up since this news from the Fed this afternoon.

We're going to get the exact statement from Alan Greenspan -- he pulled a fast one today -- from Lisa Leiter from CNNfn in Washington now -- Lisa.


Well, just to reiterate, the Fed did lower the Fed funds rate. And that is what banks charge each for overnight by 50 basis points, or one-half of 1 percent to 6 percent. And in the statement, it also says that they did lower the discount rate. And that is what the Fed charges banks for overnight loans. And they lowered that by a quarter of a percentage point to 5.75 percent.

Now, the Fed said in its statements that these actions were taken in light of further weakening of sales and production, certainly a key statement, a key part of this statement from the Fed -- the Fed also saying that these actions come in the context of lower customer confidence. We have seen those consumer confidence numbers fall to their lowest levels in two years recently. It also says that tight conditions in some segments of the financial markets, citing that they've reiterating that statement from the previous statement that they made just a few weeks ago when they decided to leave interest rates unchanged. That was on December 19.

They also cited high energy prices, saying that they have -- are sapping household and business purchasing-power. But then the Fed went on to say in its statement that inflation pressures remain contained. And the Fed said there is little evidence to suggest that longer-term evidences in technology and associated gains in productivity are abating, basically saying they are not seeing a significant slowing down in productivity, which, of course, has been one of the linchpins of this record economic expansion.

The Fed also said, finally, in the last paragraph of its statement, that it is maintaining its policy stance towards cuttings rates, saying basically that the greatest threat to the economy is economic weakness and recession. And that is reiterating the bias that they shifted to on December 19. They previously had had what is called a tightening bias or a policy stance towards raising interest rates. And they have reiterated their bias towards cutting rates, or toward economic weakness in this statement today -- Natalie.

ALLEN: Lisa, thank you. And we want to note, we have been talking about the Dow: the Nasdaq up 258 points as well right now. For more, here is Lou.

WATERS: A lot of scrambling going on on Wall Street today. And it comes on a day when the next president considers the economic situation in the United States, meeting with three dozen or so executives from big business around the nation at the statehouse in Austin, Texas. That is where CNN's Major Garrett is keeping watch over all of this.

What is going on behind those closed doors, Major?


Well, actually, we are not at the statehouse here in Austin. We were at the Intercontinental Hotel, which is just over my back here. And we have some quick reaction from a top Bush adviser -- economic adviser. Larry Lindsey, when informed by the reporters traveling with president-elect Bush about the Fed's action, he said: "Great. The Fed is always right." Very shortly thereafter, Mr. Lindsey informed the president-elect of the news.

The Bush team will clearly interpret this as vindication of what it has said for several weeks now: that there was contractions going in the U.S. economy, that there was a softening in the retail market, that there was a contraction in the manufacturing sector, and that the hits that were happening on Wall Street were going to affect people's ability to consume in the future, all things, they said, which the president-elect would have to deal with, quite possibly with a tax cut.

As you said, Lou, more than 30 chief executives from around the country -- from the manufacturing, retail, and high-tech sector -- are here. We talked to one of them before this conference begin, Fule Kwame (ph), who is a leader in the venture-capital world. We talked to him about whether or not he thought a recession was on the horizon.


UNIDENTIFIED MALE: I don't know if we are heading into a recession. But we're certainly in a very dramatic slowdown, started this last summer.


GARRETT: Dramatic slowdown that he wasn't sure was going to create a recession. But clearly the Fed's move today is an effort to short-circuit that move, which it clearly said was on the horizon. We will look forward to talking to many of these chief executives after the conference is over, get their reaction to the Fed activity. That is happening here, Lou.

WATERS: I know that it's early, Major, but part of the equation here in the incoming Bush administration is the size and shape, the structure -- as George W. Bush calls -- of the tax-relief package. As Myron Kandel just reported from New York, the Fed doesn't like these massive tax rates. They lowered the Fed's fund rate. And I wonder if the equation will be changed at all now.

GARRETT: Well, you know, it's always a very careful balancing act, Lou. And the president-elect said yesterday, when I asked him: If you cut the taxes, could that increase deficits and therefore raise interest rates? He said: No, if we phase in a tax cut, we will create revenue. Surpluses will increase in size. We won't have to worry about higher interest rates.

That is going to be a very, very delicate balance he'll have to strike, not only economically -- winning the praise of Alan Greenspan whenever he sends that economic plan to Congress -- but he is going to have to win the approval of members of Congress and members of the Senate, who never are eager to vote for deficits or something they think might cause deficits. And I think, as Myron Kandel accurately pointed out, by lowering interest rates, the Fed is hoping it will stimulate economic growth, which might undercut some of the political drive the Bush team is trying to create for its big tax cut -- Lou. WATERS: All right, Major, we will get back to you -- Major Garrett in Austin, Texas today, with George W. Bush.



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