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CNN Live At Daybreak

America Recovers: Fed Expected to Cut Interest Rates

Aired October 02, 2001 - 08:09   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.
MILES O'BRIEN, CNN ANCHOR: The Federal Reserve is trying to help the U.S. economy recover from the blow inflicted by the terrorist attacks and the long simmering slowdown which preceded it. Another interest rate cut is expected today, and the only question this morning is how big a reduction it will be?

Our Tim O'Brien is at the Treasury Department and he has some insights for us.

Good morning, Tim.

TIM O'BRIEN, CNN FINANCIAL NEWS CORRESPONDENT: Good morning, Miles.

It might be a little different this time around, we might not see that familiar walk by Alan Greenspan. The Fed is not telling us when he's arriving or where he's arriving, only that he's arriving. Why, we ask? They won't say, but it's quite transparently a security measure.

We are expecting a rate cut. Some analysts say it might only be a fourth of a percent given that so much money has been pumped into the economy already with eight previous rate cuts, but the majority of analysts say it will be a half a percentage point. Now that would bring interest rates down to 2.5 percent, the lowest since 1962, an extraordinary aggressive effort by the Fed.

The motivation may also be different here. Where in the past the idea has been to promote business spending, this time it's consumer confidence that the Fed is concerned about. Consumer confidence accounts for two-thirds of the economy's growth -- consumer spending that is, and since the terrorist attacks, there's been a great falloff in that. Initial surveys showed that consumer confidence was holding steady, but in the last two weeks, it started to plummet. The idea now is to get consumers confident in the economy, get them to spend again and get the economy going.

The rate we're talking about is the rate that banks charge other banks for overnight loans, but those rates are quickly passed on to consumers, sometimes within hours, and they can be seen in lower home equity loans, lower car loans and other loans -- Miles.

M. O'BRIEN: So, Tim, there can be somewhat of an immediate impact on these rate cuts? I mean there is the sense that there's a bit of a lag time built into this. I'm curious, although we won't see Mr. Greenspan walking in, we will be hearing from him today, and those folks like you who are used to listening to him, what will you be looking for and listening for? You sort of have to be a tea leaf reader to really pick up on things, don't you?

T. O'BRIEN: Oh you really do. Now we can expect he'll be weighing the risks of recession against the risks of inflation. Recession seems right around the corner. Some analysts say we're in it already. There are no real inflationary pressures right now and he'll be talking about that.

And these interest rate cuts do take time to work. We've had eight so far and the impact seems to be negligible. This is not going to solve the country's economic problems, another rate cut. It might help, but it's got to be part of a much larger package. And certainly this week a lot of attention is going to be focused, well, less on the Fed then on Congress and the White House and their economic stimulus package.

M. O'BRIEN: CNN's Tim O'Brien at the Treasury Department, thanks for being with us this morning.

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