Return to Transcripts main page

American Morning

What Will the Fed Do?

Aired August 21, 2001 - 11:17   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: Let's talk some more about your money.

As we said before going to the break, if you are a betting person, you bet on the quarter-point rate cut to come from the Fed chairman, Alan Greenspan, when he does speak.

But joining us now to talk some more about what to do about the money is -- three knowledgeable folks are joining us to talk about these interest rates. "MONEYLINE" managing editor Lou Dobbs in standing by there in New York. You see him there on the left. Financial correspondent Tim O'Brien is at the Fed in Washington. He's there in the center. And that means that that is Lisa Leiter on the right, who is standing by at the Chicago Board of Trade.

Lou, take it away.

LOU DOBBS, "LOU DOBBS MONEYLINE": Well, Leon, as we're looking ahead -- and I heard you talking about bet on a quarter point or 25 basis points when the Fed acts -- I think it is fair to remind everybody that there's no certainty here at all about what the Fed is going to do.

They have basically three options: a quarter point, a half point or nothing at all. And there are a lot of arguments about what could work and what might work. But what we do know is, so far this year, with six interest rate cuts by the Fed, it's had very little measurable impact on these markets. And we have a graph that will show you exactly what I'm talking about here.

There have been six rate cuts to this point, the last coming on the 27th of June. The Dow and the Nasdaq are outlined there. And as you can see, the impact is fairly contrary to what most people would think. In point of fact, since the Fed began cutting back on January 3, the Dow Jones industrials have lost 3 percent. The Nasdaq has in fact lost 18 percent.

So that is dramatic evidence that these interest rate cuts are no panacea, no silver bullet for what ails this economy and these markets. Now, one certainly can argue that there is a good case to be made that the decline would have been more precipitous, more dramatic, steeper, had the Fed not acted as aggressively as it has.

We will see what they add to that direction in the course of the day, about 2:15 this afternoon. We will find out. Let's go to Tim O'Brien now -- Tim in Washington.

TIM O'BRIEN, CNN CORRESPONDENT: Lou, are you absolutely right about the options that the Fed has before it. Hardly anybody is suggesting they won't do anything. And the leading prediction now is a quarter of a percentage point.

But an argument can be made -- and I suspect is being made in the building behind me -- for a 50-basis-point or half-point cut. The fact is, the second-quarter gross domestic product was at 0.7 percent. We now think that figure will even be revised downward. That could set off recessionary alarm bells. On the other hand, there is some good news. Consumer confidence is still up -- consumer spending down a little bit, but still strong.

It does takes time for these rate cuts to take effect. The Fed may make some mention of that. And, also, we still don't know yet the effect of the tax rebates now under way. Those factors could militate in favor of a smaller cut, a quarter percent.

DOBBS: And, Tim, one of the things we have learned is that those interest rate cuts have not, at this point -- with that lagging effect, as you properly point out -- have not really been felt with full impact. But that tax rebate -- we are hearing from a lot of retailers now that those tax rebate checks are not being spent.

In point of fact, about two-thirds, maybe 60 percent, are being saved and held back rather than spent. So that's going to create some issues, too, that the Fed will have to ponder and figure out.

Lisa Leiter in Chicago, everyone will be anxiously watching the bond market today for a reaction. What is your best take?

LISA LEITER, CNN CORRESPONDENT: Well, Lou, the bond market is looking for a quarter-point rate cut. But today might be one of those days, as has been the case with many of these rate cuts so far this year, where the bond market focuses more on the Fed's words than its action today.

This statement will be especially important, because if the Fed does not leave the door open to another rate cut, many traders telling me that the bond market could sell off aggressively. Right now, they still have a 62 percent chance priced in that the Fed will cut rates once again in October.

And if this statement talks very uplifting about the economy, perhaps indicating that the Federal Reserve's rate-cutting campaign is over, that could cause quite a sell off down here in the Chicago bond pit.

DOBBS: And, Lisa, one of the things, when you talk about the direction, this Fed and this chairman Alan Greenspan have shown, as both of you know, an inclination, once an aggressive move is necessary, to undertake it -- 10 cuts back in 1991 in quick succession.

So we -- I still think it's fair to say we can expect almost anything out of this Fed in terms of direction and size of the cut.

Lisa Leiter in Chicago, thank you -- Tim O'Brien in Washington -- now back to you, Leon Harris.

HARRIS: All right, Lou, after listening to you, I'm taking my money off a quarter-point move now.

(LAUGHTER)

HARRIS: Now you've got me all mixed up. We'll check and see how things turn out later on this afternoon.

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