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'Forbes': Rate Cut Shows Fed Afraid of 'Crash in Consumer Confidence'

Aired January 4, 2001 - 2:03 p.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

LOU WATERS, CNN ANCHOR: The president-elect is praising the Fed's move -- he calls it "a bold move" -- to cut those interest rates. A half point rate cut is expected to help rejuvenate a slowing economy, at least short term. But what does that mean? How can you and I benefit from it?

Scott Woolley, associate editor at "Forbes" magazine, joins us from New York with some answers to all of this.

First of all, where are Americans? I see in the "New York Times" where the savings rate is negative now, a minus .8 percent of disposable income. Back in '94 we were plus 6.6 percent of income. Americans apparently living beyond their means?

SCOTT WOOLLEY, "FORBES" MAGAZINE: Well, they certainly have been for at least the early part of last year. And I think one of the Fed's concerns is that they will sort of go dramatically the other way and start doing the inverse and not spending at all. So it's hard to walk the middle ground, but certainly some of the fear is that all that lavish spending will just completely evaporate.

WATERS: How can the Fed expect Americans to go "the other way," as you put it, because of a half-point rate cut?

WOOLLEY: Well, a half-point rate cut really does only affect things on the margin, but it will allow some opportunities for refinancing, cheaper business loans. And so, I mean, it will help stimulate economic growth. And clearly the Fed -- what the Fed is really afraid of is just a dramatic slowdown and a crash in consumer confidence. And this -- the rate cut really shows fear on the Fed's part that people will panic and just completely stop spending.

WATERS: Well, a lot of folks have not been spending as much, as we've heard, because their PCs have not been improved upon, the new ones coming along aren't giving them anything they don't already have, they're not buying as many cars. Would a reduction in the interest rates spur new spending?

WOOLLEY: For some things, theoretically. I think a lot of those things that you addressed, the PC issue, for instance, I can't see the problems that PC makers and Microsoft, Intel have all been having being affected by this at all. I think those are problems more with those specific markets as opposed to consumers just not having the cash on the margin or the extra spending on their credit cards to buy some of those things. But there's only so much (OFF-MIKE).

WATERS: So you think in that area that folks would spend if the market gave them something to spend on?

WOOLLEY: Well, I think in PCs specifically, they have problems that are specific to that industry. Cars, to take a different example, certainly those, a big-ticket purchase like that, is much more likely to be affected by slightly lower interest rates.

WATERS: So, how would you advise folks now to take advantage or capitalize on this half-point rate cut?

WOOLLEY: Well, there's a couple of things you can do? One, it's a good time to look at refinancing your mortgage, if you haven't done that for a while; not just because of this Fed rate cut, but because mortgage rates have been going down for a few months. So this, the Fed cut, it might be a good time to take a look at, are rates now low enough that refinancing would save you money?

WATERS: Anything else?

WOOLLEY: You can do the same thing -- a great thing to do with your credit card debt. If you don't have the option of refinancing your credit card debt with, say, a home equity loan, just make sure that you have the cheapest credit card interest rates. You know, credit card companies don't necessarily need to lower interest rates their charging you just because the Fed did. So as an educated consumer, you might need to shop around and look for interest rates that have come down and make sure that your credit card is keeping pace.

WATERS: Is it your experience that Americans, when they do refinance and save money on their mortgage, that they'll take that extra money and pay off their credit cards?

WOOLLEY: Certainly that's the -- it's the smart thing to do. If you can shift credit card debt to home equity debt, that's almost always a good idea.

WATERS: Yes, but?

WOOLLEY: And to answer your question, I think in these more nervous economic times, a lot of people will be looking to take some of the extra money they can find and pay down debt as opposed to just going on a spending spree.

WATERS: That would be the prudent thing to do.

Thanks so much, Scott Woolley, associated editor, "Forbes" magazine. We'll talk again.

WOOLLEY: Thank you.

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