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American Morning

Alan Greenspan: Further Interest Rate Cuts May be Coming

Aired July 18, 2001 - 11:08   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: Well, a warning from Fed chairman Alan Greenspan this hour. The Fed chairman tells Congress the economic slowdown is not yet over, and he's talking about the possibility of cutting interest rates once again. Mr. Greenspan is making his twice yearly report to Congress.

(BEGIN VIDEO CLIP)

ALAN GREENSPAN, FEDERAL RESERVE CHAIRMAN: The economy as a whole was growing at an unsustainable pace, growing further on an already diminishing or diminished pool of available workers and relying increasingly on savings from abroad. Clearly, some moderation in the pace of spending was necessary and expected if the economy was to progress along a more balanced growth path.

(END VIDEO CLIP)

HARRIS: To bring us a little perspective on Chairman Greenspan's views, we turn to our own economic guru here, Lou Dobbs, in New York, who's been standing by listening to the Fed Chairman's comments all morning -- Lou.

LOU DOBBS, "LOU DOBBS MONEYLINE": "Economic guru" -- thanks!

Leon, what is remarkable in the Fed chairman's testimony and also in the question-and-answer session with members of the House Financial Services Committee today is the clarity with which the chairman is speaking.

Addressing the issue of the weakness of the economy, which he says he suspects will be prolonged in that it is not near an end -- that he believes that lower energy prices that those tax rebate checks that are in the mail next week will have an impact. And the effect of six interest rate cuts over the past six months should begin to have an effect. They have a lagging effect, if you will, in the economy. But in terms of interest rates, let's hear what the Fed chairman said rather directly on the score.

GREENSPAN: The conditions warrant, we may need to ease further, but we must not lose sight of the prerequisite of longer-run price stability for realizing the economy's full growth potential over time.

DOBBS: That is about as clearly as any Fed chairman, and certainly this one, will ever put the prospect of an interest rate cut, Leon.

HARRIS: And you know, when we first began talking this morning, the first comment that you made was that he normally does not come right out and say in these sort of -- these hearings what should happen with interest rates. Now that he's done so, how do you interpret that in terms of urgency here?

DOBBS: I think that the Fed has made it rather clear, there's considerable urgency in its views on monetary policy. It has, as I said, cut interest rates six times, reducing short-term interest rates by 275 basis points. Now that coming within that compressed a period of time suggests great urgency.

The Fed's remarks today offers clarity about at least the Fed's thinking and certainly the Chairman's thinking at this juncture as we are just about a month away from the next Federal Open Market Committee Meeting. That meeting, of course, will determine whether or not the Fed cuts rates again on August 21.

HARRIS: As we've been looking throughout the morning, we've got a chart that shows minute-by-minute the way the Dow has been reacting to the news that we've been getting out of Washington.

DOBBS: Right.

HARRIS: And as we see here now, as of 11:03, it is down I can barely read those number.

DOBBS: 180.

HARRIS: OK, but it's back up actually from where it had been a few minutes ago. What do you make of the way the markets are digesting this?

DOBBS: Well, the markets sold off. We're now just about 40 points better than we were not more than 15 minutes after the Fed Chairman's testimony started being reported in the markets. The markets are obviously assessing this.

Now as important as the Fed chairman's remarks are, and they are very important to investors, and there has been great anticipation of these remarks, we are also today watching investors try to deal with disappointing earnings reports from a number of companies. We are seeing strength in tobacco. We're strength in the pharmaceuticals, which by the way were considered rather weak just two weeks ago. But nearly every other sector is hard-pressed. Despite good news on inflation this morning from the consumer price index, good news in terms of housing starts and pockets of strength in this economy.

Investors have a lot to assess here, Leon. And the Fed chairman is giving some hope here. Now while he's talking about prolonged weakness in the economy, he's also offering great hope and frankly the suggestion that we're going to see another interest rate cut. That is good news to investors and that is also playing into their assessment of all of these variables that they have to analyze, understand, and plan against in their investment decisions. HARRIS: That's good news for investors, but what about just the average everyday consumer under the prospect of more interest rate cuts? Finally will you see movement in mortgage rates down the road, do you think?

DOBBS: As you know, the mortgage interest rate is not determined by short-term rates which the Fed is managing here but rather by the bond market and specifically the 10-year bond. This morning we are seeing the 10-year bond decline slightly. The bond market is still a refuge in moments and periods of uncertainty in equities markets.

So I think we're going to see some -- some decline in long-term rates. But that is not going to happen quickly, it certainly will not happen as quickly as short-term rates coming down. The best view for the consumer here is that there will be a continued, albeit slight impact in terms of credit card rates. There will be obviously for prime rate borrowers, small business, a much more profound benefit as a result of the short-term rates and lending rates.

HARRIS: All right, Lou Dobbs in New York. Once, again, thank you very much for the expertise.

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