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CNN Live Sunday

How Low Will the Fed Rate Go?

Aired June 24, 2001 - 17:16   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.
STEPHEN FRAZIER, CNN ANCHOR: There is little doubt that the Federal Reserve will cut U.S. interest rates again during this week's policy meeting. The question is by how much? Fed watchers agree a cut is needed to keep the world's largest economy from sinking into recession.

Joining us with a look ahead now is Margaret Popper with Business Week Online. Ms. Popper, thanks for coming back to join us again. Good to see you again.

MARGARET POPPER, BUSINESS WEEK ONLINE: Glad to be here.

FRAZIER: I want to make sure that we're not overstating this. There have been five rate cuts already this year. Are we taking it for granted that there will be another one, and are we focusing on just how big it will be or whether?

POPPER: I don't think that there's any doubt that the Fed will cut again. I think right now, Greenspan's target is corporate earnings. He is worrying about getting business spending back on track and in order to do that, he's got to cut again.

I'm betting he cuts 50 basis points, and I'm betting that because I think there's a lot pessimism among CEOs, and that's the mentality he's shooting at right now. He was worried about the consumer for the last couple of cuts, and I think the consumer has hung in there. So, that's not really the worry. People are going to the mall. When they're out of the mall, it's for mundane things like the weather, not because they feel the pinch in their pocketbooks.

FRAZIER: Right, now with all that confidence shown by consumers, why are CEOs so pessimistic?

POPPER: Well, they keep talking about having lack of visibility, and I think that that's another way of saying, I predicted that my growth was going to continue at 50 percent a year for the next five years last March, and I don't want to be caught with my pants down again. Wall Street does not like that.

FRAZIER: But of course, that is exactly what's happening. An awful lots of corporations have announced that they're going to miss their targets, even if just a little bit.

POPPER: Well, I think in the second quarter, you have expect -- first of all, that things overall will be worse than they were in the first quarter. The first quarter really was the beginning of the substantive slowdown.

FRAZIER: Now, back up, why should we expect that? That's a good statement to make, but what's underlying it?

POPPER: Well, I think that it's been pretty clear that the Fed had been putting on the brakes and tightening and tightening and tightening through May of last year, and the effects of that really only began to be felt in the fourth quarter, and the U.S. economy -- the metaphor that everybody likes to use, which is absolutely true, is that it's like an oil tanker.

You start to turn it, and it takes a long time to get it around the bend. So, we still have the downward momentum to get through, and I think that will happen through the second quarter because inventories have not yet been cleared up. There's still too much stuff sitting in warehouses, too much capacity for the demand out there.

FRAZIER: That's one of the key indices that I know people like you watch. What else? These obscure numbers that you're watching, like cardboard boxes that get ordered, what are you learning from that kind of thing?

POPPER: I think that we're seeing a little bit of stabilization on the PC side. Oddly enough, personal computer sales have stopped sliding. I think that we're seeing, again, some bottoming in semiconductors.

Where we're still seeing a significant downward trend is in telecommunications and telecommunication equipment. That looks bad, and it should look bad. That's where most of overbuilding happened. So there's the biggest correction to be made in that sector, and that's effecting everybody all the way back down the food chain.

FRAZIER: Fundamental Economics 101 question: If there's oversupply, why don't they just cut prices and make things more attractive for consumers or their corporate clients?

POPPER: Well, there certainly has been a lot of price cutting, and that's gone a long way to cleaning up the excess inventory in the first quarter and will continue through the second quarter.

By the same token, I think that, in fact, most companies feel that they can't actually raise prices. It's still too competitive out there. The consumer is really driving pricing here. If they don't get it from an American manufacturer, they can get it from somebody abroad.

FRAZIER: Which is good news, still, for Main Street, then, even if Wall Street is complaining.

POPPER: That's right.

FRAZIER: Well, then we'll look forward to see what happens on Tuesday morning. I guess it's about mid-afternoon that they make the announcement, isn't it?

POPPER: Yes, and I'm betting 50 basis points.

FRAZIER: Well, we'll hold you to that. We'll have you back here to see how you made out.

POPPER: OK.

FRAZIER: Margaret Popper, thank you for joining us.

POPPER: Thank you.

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