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CNN Live Sunday

Federal Reserve Meets on Tuesday to Discuss Interest Rates

Aired August 19, 2001 - 17:18   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: Investors keep earnings of corporations in mind as they watched another week end on a rough note on Wall Street. The Dow Jones Industrials Average closed Friday at just about 10,240. It dropped 151 points for that day. The Nasdaq technology-based index ended the week at about 1,867, after it closed down more than 63 points on Friday. A rough end to a rough week.

So, what do forecasters think about the economic climate now, as the Federal Reserve prepares to meet and may make a change? We are talking next to professor Don Ratajczak, he's here, the former director of the Economic Forecasting Center and a frequent guest with us. Welcome back and thank you for joining us.

DON RATAJCZAK, ECONOMIC FORECASTER: Well, thank you.

FRAZIER: They meet on Tuesday. What are they looking at this time?

RATAJCZAK: Well, they are seeing an economy that is still weak. The manufacturing sector has all the impression of being in a recession. And of course, the new economy looks quite weak as well.

There are areas of strength. Your discount department stores are doing well, and housing has held up very nicely, but basically there's more weakness than strength, and the Federal Reserve, I believe, is going to say, we still have to worry about the weakness more than about any inflation.

FRAZIER: Last time we talked it was about how consumers were keeping the economy going. Interesting, though, you mentioned that the discounters do well, but luxury retailers were really hitting the chops in their last reports.

RATAJCZAK: Yes, the specialty stores and the department stores are really struggling at the present time. Basically, the consumer is very price-conscious. They will spend if they see a deal, but if there is no deal there is no spending.

FRAZIER: And how do you explain the strength of the housing market that you just mentioned?

RATAJCZAK: Well, I think what's happening is that people are looking at an alternative investment to the stock market, and they have now found that housing not only works as a place to live, but the prices have been going up every year. So, they are actually looking again at a house maybe not just that they want to live in, but one that they think they can sell for a profit.

FRAZIER: You know, some us are old enough to remember that the stock market was the place where you lost a lot of money and the housing market was where you got on the escalator and watched appreciation in the '70 and the early '80s. Back to that now.

RATAJCZAK: Well, if you take a look at what happened this year so far, the stock market has lost people about $1.25 trillion, and housing market has gained them about $1 trillion, so it's almost a break-even, if you had both of them.

FRAZIER: And if the Fed were to cut rates, say a quarter point, that would only improve things for people looking for a mortgage or for a house?

RATAJCZAK: That's correct, and in fact, sometimes a cut in the interest rates has not gone into mortgages, but right now we are seeing again that the long-term interest rate, and therefore mortgages, are starting to respond again to the Federal Reserve. So, this is the time to call up your mortgage lender and see if they can give you a better deal.

FRAZIER: You have been incredibly accurate in predicting what the Federal Reserve will do. What's your call for their meeting?

RATAJCZAK: It's a quarter of a point, but what we will be looking at is what their language is, and earlier we thought there was some concern that the language be, well, you know, it's now time for us to wait and see. But I think they are going to keep the door open and say, here is a quarter point, and if things don't change, look for another quarter at the end of September.

FRAZIER: And they actually make it that clear and spell it out that clear?

RATAJCZAK: No. This is the Federal Reserve. You have to read between the lines to figure out what they are doing.

FRAZIER: But that's what you think you're going to see?

RATAJCZAK: That's what I expect to come out.

FRAZIER: And are they mentioning any particular sectors in these, you know, oracular readings that you look at so closely, that they worry about more than others? You mentioned manufacturing. Ford, Boeing really demonstrated what you said has come true -- 5,000 jobs at Ford on Friday.

RATAJCZAK: Yes, they're certainly going to be most worried about the manufacturing sector, and of course the layoffs just continue to come. In July, they announced layoffs were the largest since the last recession.

FRAZIER: Which was when? RATAJCZAK: Well, the last recession was the 1991. So, we are showing characteristics that look somewhat like a recession, and although the numbers aren't quite there, they are very close to it.

FRAZIER: But nobody wants to use that word. So, be very careful. We will just call it the "R" word for now.

RATAJCZAK: That's right. It's not quite "R" yet. It's cute.

FRAZIER: Getting closer though. Professor Ratajczak, thank you for joining us once again. We will be listening to you probably mid- week, after the Fed issues its announcements.

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