Return to Transcripts main page

American Morning

Federal Reserve Interest Rate Cuts Aimed at Revving Up Sluggish Economy

Aired August 21, 2001 - 09:32   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.
KYRA PHILLIPS, CNN ANCHOR: The Federal Reserve interest rate cuts are aimed at revving up the sluggish economy, but what do they mean for your financial bottom line?

CNN's Valerie Morris looks at how the rate cuts affect you, the consumer.

(BEGIN VIDEOTAPE)

VALERIE MORRIS, CNN CORRESPONDENT (voice-over): During the last year, the Federal Reserve has cut interest rates six times. The aim? To stimulate the economy by making it cheaper for households and businesses to borrow money. Traditionally, lower interest rates give consumers the most help on mortgages and credit card debt.

The Federal Reserve is expected to cut interest rates by at least a quarter percentage point, but financial specialists say consumers shouldn't expect much immediate relief. Here's why: Long-term mortgage rates are tied to the Treasury bond market and react in anticipation of fed policy moves, sometimes up to a year in advance. So as the fed began aggressively cutting rates last January, the popular 30-year fixed mortgage rate was well on its way to some of the lowest levels in years.

David Berson of Fannie Mae says, don't expect a dramatic move in mortgage rates after today's expected rate cut.

DAVID BERSON, FANNIE MAE: The impact on fixed rates is likely to be very little, but still, mortgage rates remain extremely low today low on a historical basis, so home buyers today are still getting a pretty good deal, even if mortgage rates don't go down when the Fed eases.

MORRIS: And what about credit cards? While traditionally it's consumers with fixed rate credit cards that miss out when the fed cuts rates, these days, not even variable rate card holders are guaranteed any relief. That's because some cards have already reached their rate floors, which are established by credit card companies as protection from interest rate cuts. About a quarter of all variable rate cards in the U.S. have these lower limits.

TRAVIS PLUNKETT, CONSUMER FEDERATION OF AMERICA: On your variable rate card, there is no ceiling. That is, they can charge rates as high as they want to, but there may be a floor. That is, at a certain point, if the cost of money goes way down, those rates will hit a bottom and won't go below it.

(END VIDEOTAPE)

MORRIS: Industry observer cardweb.com says if the Fed continues to lower rates, more companies could add rate floors to their cards. Check the fine print to see if yours does. That's your money.

Valerie Morris, CNN Financial News, New York.

PHILLIPS: This year's interest rate cuts represent the fed's most aggressive action in nearly two decades, and still the economy is sputtering.

Joining us to talk about whether the rate cuts are working is Rajeev Dhawan. He is director of the economic forecasting center at Georgia State University.

Good to see you. Thanks for being with us.

RAJEEV DHAWAN, GEORGIA STATE UNIVERSITY: Good morning. My pleasure.

PHILLIPS: Let's begin. When do we actually see the effect of these cuts? Is there anyway to gauge it?

DHAWAN: Yes, six to nine months minimum here in the decent impact on the rate cuts and already seen some impact in the interest rate sector. For example, the mortgage rates are down from last year and the automobile sales have gone up, because the financing is cheap. So we have already seen impact on two sides, which is the automobile sales and housing stocks, which have been doing very well. But we haven't seen what we call the job generation, the job growth, which we are looking for, which we call the recovery, which expect to come like in four or five month, you know.

PHILLIPS: what about the loan generation? Does that have to catch up, too?

DHAWAN: Yes. Once the loan catches up to borrow people to start the investments, you will have the job generation.

PHILLIPS: Inventory correction, explain to this to me.

DHAWAN: It basically means getting rid of the undesired goods from the shelves which you have stocked up a bit more. For example, every business keeps a little bit of products on the side in the warehouse to sell when there is a demand, and it takes a time -- a little bit of time before the production happens and then the good gets delivered, and then to keep a thing called the inventory. Once you have a little bit too much of that, to do a fire sale, like getting rid of it, and then only produce it more, and producing more means hiring more people and producing more job.

PHILLIPS: Massive sale, right? DHAWAN: That's what you see. The sectors like the cars or the computers or even clothing, you know?

PHILLIPS: Consumer spending is the clincher here, correct?

DHAWAN: Correct. In my reporting, there was a title as to why us consumers don't lose our cool. We need to keep spending in the decent amount. Not like in the last couple of years, but we just have to keep doing our parts, because the businesses are going to take a while before they start revving up the capital spending which implies more capital businesses, which means more hiring. That I am seeing in a proper capital spending coming back in line maybe a year from now probably, but in the next six months, I want to see some job generation if my forecast is to come true, for us to spend a little bit more. And the tax cuts checks that are coming in and the rate cuts by the Fed before are going to help, bet we'll have to be a little patient.

PHILLIPS: And in the past, just the notion that Greenspan was going to make the cuts, but it's much different this time around.

DHAWAN: The last couple of times to cut the rates -- one was in '87 and one in '98 -- was the response to the financial loss in the market, when there was a loss of confidence in the market. At that point, the implied rate cuts or the statements by the federal bank have a more psychological impact in the market. Right now is the fundamental in the real economy. Too much production last year, the Fed was trying to control it, and now we have a little bit of loss in the confidence on the business side; it takes a while for it to come back. It's not a financial problem. Of course if you hold the tech stock, of course it's a different story.

DHAWAN: All right. Rajeev Dhawan, thank you very much. We sit patiently and wait.

PHILLIPS: Thank you -- Leon.

LEON HARRIS, CNN ANCHOR: I don't know about that patient part. Professor Dhawan was talking about the consumer confidence.

Economists say consumer spending has been keeping the economy going, but people's confidence in the economy is slipping.

Joining us from Princeton, New Jersey: the man with his finger on the public pulse, Gallup poll editor-in-chief Frank Newport.

Good morning, Frank. Good to see you again.

Let me ask you first of all, what are you seeing in the polling that you guys having doing about how seriously the public is taking this right now, the problem with the economy?

FRANK NEWPORT, GALLUP POLL EDITOR-IN-CHIEF: It's a good question. Our last August update we finished on Sunday, Leon, and I would say relatively speak not seeing the kind of concern that we saw back in the early 1990s. Look at this question, it's important to us. What's most important problem facing the country today? You can see the economy is number one; 50 percent of Americans mentioned it. Jobs are number 2 at 9 percent, and then off to other topics. Back in '91, '92, the economy was 40 percent mentioned, and jobs were like 25. So nowhere near that kind of concern that we saw in the '90s, but these numbers are slightly up this year, Leon.

HARRIS: What are you showing about how people will think that this will turn around or when it will turn around?

NEWPORT: Well, we thought that we were seeing some optimism through July. We have been measuring this every single month and seeing the bottom lines of the percent that the economy is getting better, what you were talking about there, Leon. It had been 25, up to 35, and we said, a-ha, people were getting optimistic, and our hopes are shattered this month, so no sign yet that the consumer is saying, it's up, it's up.

HARRIS: What about the personal finances and ask that later on and asking the folks how they can save money? What are you seeing about that?

NEWPORT: People are usually more positive about themselves than they are to pontificate about the economy in general, and sure enough find the same thing. This is the key question, rate your personal finances right now. That's a little bit over 50 percent in the top two boxes, and just about a third when they rate the national economy. But whether we track this over time, these kind of numbers still don't look very hot when people are rating their own personal finances, Leon. No uptick in these numbers.

HARRIS: All right. Good deal, Frank. We do appreciate that. We will talk to you later.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com