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CNN Live Today

Fed Leaves Interest Rates Unchanged

Aired March 19, 2002 - 14:16   ET

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

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
BILL HEMMER, CNN ANCHOR: Let's bring in someone else to talk about it right now, about the Fed decision. Economist Donald Ratajczak is our guest now, the former director of the Economic Forecasting Center at Georgia State University, now CEO of a venture capital firm. Good afternoon to you.

DONALD RATAJCZAK, ECONOMIST: Good afternoon.

HEMMER: (UNINTELLIGIBLE) we talk just about every single time. As we wait on the decision -- again we'll continue to watch this monitor here -- why move on rates at all right now? Why not just sit tight?

RATAJCZAK: Well, I think they probably will sit tight. But remember, they've had the window open towards further easing. And so, what they want to do is warn people that, hey, this recovery might be getting going and there might be a need some time soon to raise rates. I don't think they are ready to raise yet, but I think they are ready to tell people, change your thinking. The next move is up and it might be soon.

HEMMER: So despite the bias that may be applied and attached here, it doesn't necessarily mean come May Or June that they are going to get a bump?

RATAJCZAK: It doesn't mean anything is guaranteed. The numbers could fade. But right now, the Fed is looking at relatively strong numbers. They've got a four-tenths increase in industrial production. That's equivalent to about a five-percent growth in the economy. They're ready, if this continues, they probably are going to try and slow it down a little bit.

HEMMER: And what do we say to consumers now? Whether it's credit cards or whether it's home mortgages in terms of refinancing, should you do it now or have you missed the boat knowing that already interest rates for personal loans are already creeping up higher?

RATAJCZAK: Well, the best -- obviously, the best chance was last October.

HEMMER: That it was.

RATAJCZAK: But this is still good. And basically what the Fed is saying is that be prepared to see short-term interest rates go up and probably go up relatively significantly in the next year or so. And that means if you are going to make those decisions, make them now.

HEMMER: When Alan Greenspan said a couple of days ago that the recovery for the economy is well under way, in his words, a bit of telegraph message to the markets and the rest of us?

RATAJCZAK: Well, he was looking at his own numbers. And his numbers said January we improve, and February we improved even more. And that's kind of telling him that, hey, we're finally engaging in a recovery. It is going to be slow, but it looks like it's there.

HEMMER: I heard you say earlier that you believe the Fed is a bit nervous right now. I mean, we're at a 40-year low in terms of rates. Is there nervousness there or not?

RATAJCZAK: The Federal Reserve doesn't want to keep rates at 1 3/4 percent. Their normal rule is to have about two percentage points over the inflation rate. Right now, that would be something over three percent. And because energy prices are rising, inflation rates will probably go up some. So, probably early next year, it will be something over four percent is what their comfort level will be.

HEMMER: There are those who say go lower. Why not emulate what Europe is doing right now. Their rates are practically on the floor. Econ 101, is there danger relative to our own economy to do that?

RATAJCZAK: There is considerable danger. If you let the rates go too low, you can unleash a speculative bubble like we did in 1999. And then you have to mop up the problems that speculation creates. So it's better to find a nice path and get us on it and then keep us there.

HEMMER: Got it. Do we still have Rhonda with us? Rhonda Schaffler on the floor? Back to Rhonda Schaffler...

RHONDA SCHAFFLER, CNN FINANCIAL NEWS CORRESPONDENT: You still do.

HEMMER: Hey, Rhonda.

SCHAFFLER: Hi, Bill.

HEMMER: I understand we're a few seconds away from this.

SCHAFFLER: That's right. And what we should see at this point that is once that announcement comes out, you will see these traders around me start to move. A lot of people will wait to fill orders until the announcement actually comes out. So we're going to get that in just a couple of minutes.

Again, what the people here will be looking at closely is the statement, Fed leaves interest rates steady, sees balance risk status is shift to neutral position. The Fed goes on to says it -- looks like an economic recovery is being commented on here. Discount rate, a symbolic rate, remains unchanged. Final demand on strength still uncertain. These are some of the very first headlines the traders will see and will make their next trades on -- Bill.

HEMMER: Rhonda, you mention the word neutral. That is pretty much as advertised or guessed anywhere, anticipated.

SCHAFFLER: Exactly. This is exactly as expected. So no surprise from the Federal Reserve, who will wait to see over the next couple of moments what the market does in response.

HEMMER: All right. Back to Don Ratajczak here. No surprise there, obviously, based on what Rhonda is reporting. And now we know the news, unchanged but the bias goes to neutral.

RATAJCZAK: Right. Now this gives them an opportunity, if we continue to get 0.4 percent gains in industrial production, they can then start to pull back on the reigns and raise rates. So they're in a position to do that now.

HEMMER: It is March 18 today. The Fed is going to meet again first part of May. What do they watch? What is most critical for them as they eye this recovery?

RATAJCZAK: Well, the key numbers are how strong is overall economic activity, and that industrial production and GDP will be those numbers. No. 2, are people finding jobs, so the employment growth rates. We had our first job growth rate in more than a year in February. So they are going to see if we can do it several months in a row. And then the third thing they are going to look at is is there any inflationary risk because there's concern you don't want the economy to be too slow. But if it gets too fast and starts to generate inflation, then you've created your other problems.

HEMMER: Just hearing in my ear here, the Fed said today that it believes the U.S. economy is expanding, their words now, at a significant pace. What does that indicate to you?

RATAJCZAK: Well, as I say, the February industrial production figures at 0.4 is really consistent with about a five percent growth in the economy. Now, in the beginning of recovery, five percent is nothing exciting, but...

HEMMER: Sure.

RATAJCZAK: ... under normal circumstances, five percent would be an exceptionally good performance. And this is one of these things we can have a few five percents, but can't have five percent for a couple of years or you are going to create real problems.

HEMMER: Got it. Thank you, Don. Appreciate it. Good to see you, again.

RATAJCZAK: Thank you.

HEMMER: We will meet again when the Fed meets again.

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