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LIVE FROM THE HEADLINES

Interview with Ruben Farzad

Aired June 24, 2003 - 20:20   ET

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

PAULA ZAHN, CNN ANCHOR: By this time tomorrow the interest rates could well be lower. Federal Reserve officials began a two-day meeting or actually began that this afternoon and most observers expect them to lower interest rates in an attempt to boost the economy. How low can the rates go?
Let's ask Ruben Farzad an economics writer for "Smart Money," good to see you.

RUBEN FARZAD, ECONOMICS WRITER: Good to see you, Paula. Thanks for having me.

ZAHN: And what is this betting man saying tonight?

FARZAD: Well, the market is pricing in some manner of rate cut whether it's a half a point or a quarter of a point is kind of fait accompli at this point but you can read the tea leaves either way.

People will be worried if it's too low. They might be worried if it's too high. Does the Fed seem overly concerned about this market? So, it's not anything we haven't seen in the past two years.

ZAHN: Is a quarter of a point going to make any difference at all in the economy?

FARZAD: I just don't think so. I mean the idea out there the conventional wisdom is that this would make it a trifecta of stimulus. You've had a big tax cut earlier in the year. You had the market improve markedly, pun intended, since March, and this hopefully will get us over the hump to recovery.

ZAHN: Let's talk about what this might mean to consumers. We're going to start off tonight by looking at mortgage rates and see how this tracked out since 2001. You could get a 30-year fixed rate mortgage for about 8.52 percent. Right now the national average is about 4.98 percent. So, if I own a home or want to refinance a home can this give me much help?

FARZAD: Yes. If you're -- this has been an anticipatory thing with the mortgage market. The mortgage market is very forward looking and rates have consistently come down in the past 12, 24 months so you can give yourself a raise effectively by getting a refinanced mortgage. That said, it's harder for new homeowners because the price of homes has gone up and they have to take on more in terms of principal.

ZAHN: Car loan rates can't get any lower than they are right now, can they?

FARZAD: No, zero percent financing and Detroit is struggling because of that. At a certain point they kind of have to wean consumers off that.

ZAHN: Yes, but what consumers are going to be weaned off that? They've kind of gotten used to that, haven't they?

FARZAD: Whether you're talking about zero percent financing or a 99 cent Big Mac that's a big problem with this economy. Few companies have pricing power and that might sound fine if you're a consumer but it cuts both ways if you get laid off because your company is not profitable.

ZAHN: Let's move on to credit cards and take a look at what credit card companies were charging in an average back in 2001, 15.83 percent. A year later it was down to 14.60 percent. Last month it was at 14.94 percent. Why don't these rates translate to lower rates for borrowers?

FARZAD: Because with borrowers you're talking about credit risk and the credit card market is not as heavily subsidized by the U.S. government as the mortgage market is.

Banks can turn around, offload mortgages to the government essentially with Fannie Mae and Freddie Mac and take on new loans. Credit card companies can't do that and they've actually seen a rise in delinquencies.

ZAHN: All we've been talking about tonight is spending, spending, spending.

FARZAD: Right.

ZAHN: Let's talk about saving, saving, saving. If this rate cut goes through tomorrow where do you propose that people park their money?

FARZAD: It gets harder and harder and harder. Just looked at a money market account of mine earlier in the week and was shocked to learn that it was yielding .4 percent and if you think about it...

ZAHN: You got to work until you're 100, right?

FARZAD: You have to work until you're 100 but in real terms with inflation nearly two percent you're actually losing money in real terms by keeping it in a money market account. But that said, people were so hurt by the market crash by the market correction they were so heart broken that they're that afraid to get back in it. They'll even tolerate puny yields.

ZAHN: Well, we are going to test your acumen tomorrow when we see what the Federal Reserve decides, smart man working for "Smart Money" Ruben Farzad, thank you.

FARZAD: Thanks for having me. TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com




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