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CNN Live At Daybreak

How Do Interest Rate Cuts Affect Average American?

Aired June 27, 2001 - 08:25   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.
BRIAN NELSON, CNN ANCHOR: A half point, a quarter point or none at all: What will the Federal Reserve do about interest rates?

Rajeev Dhawan -- he is the director of the Economic Forecasting Center at Georgia State University. And so it is his job, I understand, to make these predictions.

Mr. Dhawan, welcome. Thank you.

RAJEEV DHAWAN, DIR., ECONOMIC FORECASTING CENTER, GEORGIA STATE UNIVERSITY: Thank you.

NELSON: Thank you for being here.

We're going to get right to our e-mails, which we've solicited earlier. So let's start with the first one, all right?

"We are considering refinancing our home in order to cover college costs for our son and to support our 101-year-old great-aunt. How might Mr. Greenspan's decision regarding interest rate cuts affect the interest rates?" This is from Barbara (ph).

DHAWAN: I want to clear the air over here. The rate cut by the Fed will be on the short-term rates. It may or may not impact the long-term rates, which is like the 10-year bond rate or the 30-year bond rate. And that's what determines the cost of financing a mortgage.

So this rate cut may or may not change your cost of refinancing.

NELSON: All right. Then, this may apply to the next question from Rory (ph): "I work at a mortgage brokerage. What should I tell my clients who are dragging their feet and unsure about refinancing for a better rate?"

Should they wait or should...

DHAWAN: Well, if you're looking for refinancing at a better rate for the loan, which depends upon the prime rate, then by rate cuts, this prime rate will come down. So they can refinance it. And he's raised a very interesting point: A lot of people are waiting for this round of rate cuts to get over.

So once it gets over, they can refinance at a better rate. But if they keep on thinking that oh, another month, another rate cut, and I can do it later, well, Greenspan needs to make a decision today whether he's going to say this is the end or there's more in the pipeline.

NELSON: The mortgage rate -- mortgage rates drop in advance of stuff that Mr. Greenspan might be doing later on. That's why it doesn't really have a direct impact, right?

DHAWAN: Actually, the markets' rates dropped earlier part of this year, which was dependent upon what happened to the 10-year bond rate.

NELSON: Yes.

DHAWAN: Which dropped a lot, even before Greenspan was cutting rates. So it's...

NELSON: So if you're holding up for a drop in mortgage rates...

DHAWAN: Right.

NELSON: You're wasting your time.

DHAWAN: You're wasting your time.

NELSON: OK, third e-mail: "After over a year of rate reductions by the Fed, why haven't I seen a single rate reduction in any of my major credit cards" -- this is a real good question "in my store charge accounts, etcetera? How are these rate reductions suppose to affect the common person?"

That's from Bonnie Spencer in Las Vegas.

DHAWAN: Well, the interest rates from the credit cards and the discount cards, they never change. I've been seeing them at 19 percent-plus for the last 10 years.

And the reason is that they are for the -- they are the highest rates for the marginal borrower, the most riskiest borrower. So they never change. That's why they tell you never to finance...

NELSON: Through a credit card.

DHAWAN: Through a credit card.

NELSON: Go to the bank.

DHAWAN: Go to the bank. And if you can get a loan for your car or something, that interest rate will change depending upon what happens to the interest rates by the Fed.

NELSON: OK, so we're two for two here in any impact for the consumer. Let's go to the next question: "Can you tell viewers the difference between the federal funds rate, the discount rate and the prime rate?"

Well, we're going to interrupt here for a minute -- I'm sorry. Hold on for just a moment.

(INTERRUPTED BY LIVE EVENT)

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