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Breaking News

Fed Shocks Wall Street, Cuts Interest Rates

Aired April 18, 2001 - 11:32   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.
LEON HARRIS, CNN ANCHOR: A breaking story this morning. Word that the Federal Reserve has authorized a one half percent cut and a key interest rate. There you see the result on the markets right now. The Dow Jones Industrial is now up 359 points; it was up well over 400 just a few moments ago. Nasdaq is up big time as well. You see the Nasdaq numbers there at the bottom of your screen; it is up 154. And the S&P is also up 43.

Now, let's check in with Terry Savage, one of our favorite columnists out of Chicago who has been watching this for us.

Terry, what do you make of what is going on here?

TERRY SAVAGE, CNN CORRESPONDENT: It's hard to figure out what to make of it. I think the first question comes to mind is, what does the Fed know that we don't know? What economic report did they get an early peek at? What convinced them they needed to meet, after they said they weren't planning to cut rates before their next May 15th meeting, what promoted this need to go out and do it by phone, meetings, cut 50-basis points?

HARRIS: See, Terry, that's why you make the big bucks; you were thinking -- you said exactly what we've all been thinking this morning: what is it that they are seeing? I was talking with our Myron Kandel about this at the top of the hour, and we were all saying that, well, you know, looks like the market -- many people thought the markets might be reaching the bottom and could be turning around, so the idea of actually putting some juice in the economy to turn the markets around couldn't be it. Lots of companies had gotten rid of excess inventory. So, What is going on here?

SAVAGE: I think the Fed may be seeing underlying weakness. What has happened is, we continue to see announcement of layoffs, and of lower profits and of lowered expectations for future profits. Layoffs haven't all hit yet, but now people are starting to actually get the pink slips; it's the announcement versus the reality.

And I think even consumer spending for the first quarter or last month, we saw some unexpected weakness. Consumers have been carrying the economy; if they lose jobs and cut back, then we could have a more serious problem than just what we've been calling an inventory slowdown.

So, the Fed actually didn't do this to boost the stock market; you are right, Leon. They saw the markets rallying, they must have seen something else underlying, and frankly, that's a little worrisome.

HARRIS: Well, that's what I'm going to ask you next; does this mean that maybe what we are seeing right now on the markets, this could just be like a one day wonder or a one morning wonder, that perhaps that creeping feeling sinks in, in a few hours or so, then the numbers go down and go down dramatically?

SAVAGE: We are fighting two issues here. The first rule of investing is, don't fight the Fed. If the Fed wants to cut interest rates, makes it unattractive to leave your money in bonds, makes you want to go out and buy stocks, than you have to go along with the Fed. On the other hand, yes, I think there's a reevaluation of why the Fed acted like this.

I'll leave you with this thought; we said this on the downside when markets are plunging, let me say it when they are rallying: markets are always ruled as the extreme by fear and greed. It's fear that makes you sell out on a down day; and it's greed that makes you scramble, thinking you've missed the boat to get in on a big update. Just stick with the plan, whatever the plan was. Stick with it.

HARRIS: So much easier said than done.

SAVAGE: Absolutely.

HARRIS: You know it. Terry Savage, thanks much. We'll talk to you more later on.

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