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Federal Reserve Expected to Cut Interest Rates Today

Aired October 2, 2001 - 06:20   ET


CAROL LIN, CNN ANCHOR: All right it's a big day in the financial world. The Fed is meeting today and expected to drop interest rates again, David?

DAVID HAFFENREFFER, CNN FINANCIAL NEWS CORRESPONDENT: Well, we're calling it Fed Watch, Carol and Leon, and they are expected to cut interest rates. The Federal Reserve going to sit down today and talk about what to do about interest rate policy. Most are expecting the Fed to cut interest rates by either a quarter or a half percentage point. The move would push rates below the inflation level and to their lowest point since the Kennedy administration.

And for the first time in recent memory, Fed Chairman Alan Greenspan will not be taking his usual walk across the street into the Fed building. A Fed spokesman says he will -- quote -- "enter by other means" -- unquote -- presumably for security reasons.

Meantime, stock index futures are pointing to a mostly lower open for us on this Tuesday morning. Fed days are often marked by lackluster trading as investors avoid making any big moves in the marketplace. That interest rate decision is expected shortly after 2:00 p.m. Eastern time today.

And a warning from Compaq is not helping sentiment on the Street today. The computer maker says it expects revenue for the latest quarter to miss targets by as much as a billion dollars and the company is now expecting to report a loss. Compaq blaming a typhoon that struck key suppliers in Taiwan, its merger plans with Hewlett- Packard and a falloff in sales after the terrorist attacks.

And that is the latest from Wall Street, now back to Carol in Atlanta.

LIN: All right, thanks, David.

Well we're on Fed Watch right here, and as David was saying, it would be the ninth time this year if the Fed decided to cut its interest rates. But we're wondering whether a cut is even going to help this economy, so we're going to turn to economist John Ryding. He's with Bear Stearns, and he joins us this morning.

Good morning, John.

JOHN RYDING, BEAR STEARNS ECONOMIST: Morning, Carol. LIN: What are your expectations for a Fed cut today?

RYDING: I think the Fed will move again to cut rates by a half point which would take the overnight rate down to 2.5 percent which is the lowest rate we've seen since John F. Kennedy was president.

LIN: Well have you seen any affects of the previous eight cuts yet on our economy?

RYDING: I don't think we have in the sense of providing stimulus. It's clear the economy continues to slip further into recession, in my mind, but we have to ask how bad would it have been had the Fed not taken this course of action? The economy has been turning down since October of last year, particularly in the manufacturing sector. We're now seeing the phase where the consumer is digging in, and if the Fed hadn't done what it's done so far, I think things would be an awful lot worse.

LIN: Well do you think at some point, though, the Fed is actually taking a risk in continuing to cut interest rates without really anything tangible, any sort of tangible stimulation to show for it? I mean in Japan they have zero percent interest rates and it's not helping their economy.

RYDING: Yes, but the reason Japan had its problems was Japan took so long to act in the early 1990s and so they ended up playing catch up when it was too late and they had outright deflation pressures. I don't think we've reached that point, by any means, in the U.S. And so the only risk would be is if the Fed in cutting rates were stoking up an inflation problem down the road and I see no evidence of that. Depressed gold prices, depressed commodity prices, last week oil prices fell, posted their biggest drop in a week since 1991, so I don't see any inflation pressures. And, no, I don't think the Fed is taking a risk by being aggressive here.

LIN: All right. Let's get to an e-mail question here. We've got one from Gary Galletta of Weedsport, New York, and he asks, I have 24 years left on a 30-year mortgage at a fixed rate of 8 percent. Will the rates go low enough for me to refinance, and at what rate is it feasible for me to do so?

RYDING: Well, I think at an 8 percent mortgage right now, unless there was some special circumstance in terms of prepayment palace (ph) -- I'm not a mortgage expert -- there are 30-year rates under 7 percent at the present time. And if you go for an adjustable rate mortgage there are even lower rates out there. So if I were Gary, I would be looking into that refinancing right now.

LIN: You know the Bush administration has talked about both the tax refund or the tax rebate helping to possibly stimulate the economy. And as people do refinance their mortgages, in theory they could refinance for more -- you know take money out of their equity in the house and use that money towards the economy. So all this refinancing activity that's even going on as we speak, how much is that likely to help pick up demand in this economy? RYDING: Well, Carol, that's been an enormous factor in keeping the consumer going so far. We're seeing record levels of refinancing where consumers are taking out equity from the home, so called equity extraction, to keep spending. But we really do need that more permanent form of tax relief. We have it in the Bush tax cuts; the problem is that they are spread out so far in time. So I think Congress could well do in thinking about stimulus to come back and think about accelerating those tax cuts or looking at an additional round of tax reduction at the present time.

LIN: I mean at this point don't you think that it's going to be a government stimulus package that is going to have a far more immediate and dramatic affect on what happens in this economy than interest rate cuts at this point?

RYDING: Well, the problem is government stimulus takes an awful long time to work in the sense that by the time things are passed and spending is identified and the programs get going, the economic problem is long past. That's why I think if you want stimulus to have an immediate affect you want to look at the tax code. Once a tax reduction is passed, withholding tables or rebate checks can be changed or sent out fairly quickly. So in the form of stimulus, my preference would be, above and beyond the necessary security measures in defense spending the government's going to have to take to combat the current situation, I would focus on tax measures.

LIN: On tax measures. But what happens if Americans do as the Japanese do and take that extra money and sock it away?

RYDING: Well, they might try and do that anyway even if they don't get the tax cut and that would generate a significant falloff in consumer spending. So giving people the additional financial resources to bolster their financial position is the thing they need to keep spending at the present time.

Recessions past we -- we've seen them -- had a recovery after every postwar recession. And the unique factor in this recession is we've gone into it with a very large fiscal surplus so there's plenty of room to take fiscal action. And just worrying what consumers may or may not do in response to it is no reason for Congress not to act, in my opinion.

LIN: We shall see. And they're working on it as we speak.

John Ryding of Bear Stearns, good to see you. Thanks for joining us this morning.

RYDING: Thank you.




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