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American Morning

Will a Fed Cut Pump Life into the Economy?

Aired June 27, 2001 - 09:46   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: Some economists believe a rate cut combined with the tax cut will is going to pump more life into the economy. For a look into what the future may hold for consumers, we turn now to Ransford Palmer. He is chairman of the economics department at Howard University in Washington and he is there in our Washington bureau.

Good to see this morning, sir, how are you?

RANSFORD PALMER, HOWARD UNIVERSITY: And good to be here, thank you.

HARRIS: Well, let me ask you the question I'm sure you've already been asked about a thousand times, what do you think is going to happen this afternoon when the Fed policy board gets a chance to meet and decides whether or not there will be another rate cut?

PALMER: I think they're be cutting the rate by about one- quarter.

HARRIS: Why one-quarter?

PALMER: Because I don't think a bigger cut is going to have the affect that they expect. I think one-quarter combined with a tax cut is going to have just the right kind of stimulus...

HARRIS: OK.

PALMER: .. to the economy at this moment.

HARRIS: What kind of stimulus are you expecting to see from that, and how soon do you expect to see it happen after this cut?

PALMER: Well, I think for the rest of the year we'll have a modest increase in consumer spending. I think that the tax cut will provide an increase in discretionary income, and the tax cut will reduce interest rates, perhaps, later on in mortgages. Usually the effect is about six months later. The housing market is very strong at the moment, and I think a tax cut will also contribute to that.

HARRIS: All right, so you are saying that the mortgage cuts won't be experiences -- we won't see any effect from that for another six months or so, but what about any other cuts that may come from this particular rate cut? Anything that consumers may feel come closer than the six months or so?

PALMER: Well, I think consumers will not see any major change in their interest rates on their credit card debt, and that's going to stay where it is. It's usually, -- it takes a while for this to register in the cost of credit for consumers.

HARRIS: Doesn't that kind of send us a mixed signal, though? You're saying that you expect the cuts that are coming from the tax -- or actually the tax rebate that citizens will be receiving and expect people to get out and spend that, and yet and still things are so bad that they still need to have a rate cut here from the fed. Isn't that kind a mixed signal about consumer confidence there?

PALMER: Well, the latest report indicates that consumer confidence is up and the Conference Board report just came out recently, I think, indicates that consumer confidence is up. And based upon that, I think the next few months will see a rise in consumer spending.

However, I must say that over the last several months, consumer spending is stimulated by the growth of the stock market because many people have been spending out of the appreciation of their stocks. And with the stock market the way it is right now, consumer spending from that source has sort of dried up and so consumer spending is going to have to be stimulated by something else.

Now, a reduction in the interest rate might help and combine that with a tax cut, I think that both together will have a positive effect.

HARRIS: Well, finally, if this morning, since you did bring it up, what about the stock market? Will this fed cut rate -- Fed rate cut, rather, of a quarter-point, if that's the way that it does go down, will that have much of an impact on the markets?

PALMER: Well, usually the markets reacts positively to a cut in interest rates. Some people might say that the market has already taken this into account, but I do expect the market to react positively to this cut of interest rates.

HARRIS: All right, good deal. We will check and see how things turn out this afternoon. Ransford Palmer, thank you very much for your time this morning and your insight. We sure appreciate it.

PALMER: It's been my pleasure.

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