Michelle Girard of RBS Greenwich Capital Management & Mike Holland of Holland and Company Review The Interest Rate Hike
Tuesday, March 28, 2006
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SUSIE GHARIB: Joining us for more analysis, Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland and Company. Hi Mike, hi, Michelle.
MICHELLE GIRARD, SENIOR ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Good evening.
GHARIB: Michelle, no surprise about the Fed raising interest rates. Pretty much everybody expected that, but what was -- what was your take on what they said in their policy statement? What was the most important part of that policy statement?
GIRARD: Well, the most important thing was that the forward-looking language didn`t change. That is, they still said that further tightenings may be needed to keep, you know, the risk to growth and inflation in balance. So that is exactly what they said in January and our takeaway I guess from that, is the fact that even though they`ve gone another 25 basis points higher on the Fed funds rate, they`re still inclined to take it higher again in May.
GHARIB: And, Mike, what Michelle said is what investors just hung on every one of those words some further policy firming may be needed. The Dow dropped almost 100 points. Was that drop warranted?
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Well, sure. Michelle`s takeaway and the market`s drop are one in the same thing and the concern, Susie, is that the Federal Reserve will overdo it this time as they did in 1999-2000. That`s the concern. It`s interesting to see that this new Fed governor, this new Fed president has a much different situation than the previous two. They came in with real problems. He`s coming in with a very sweet situation and the concern is that he screws it up.
GHARIB: So what`s the magic number for interest rates, Mike? What do you think it is?
HOLLAND: One and done from here, 5 percent, apparently, is baked in. One more rate increase by I think virtually everyone who is watching the Fed. But after that, I think it`s time for a rest. Take a summer vacation.
GHARIB: Michelle what, do you think? A lot of people are saying that 5 percent is inevitable, but then what happens?
GIRARD: Well, I agree. I mean, I think they`ll go to five, and then I think they`ll pause, and they`ll wait to see how the economy holds up through the summer. Now, our feeling is that the economy is going to continue to show enough strength that the Fed will probably come back in the second half of the year and nudge rates just modestly higher. We actually think the funds rate will end the year at 5.5 percent. We`re getting close to done, and I do think we`ll see a pause if the summer, but the economy is going to continue to show a lot of strength.
GHARIB: Let`s talk about that. The Fed devoted a whole new paragraph that wasn`t written in the Greenspan days about the state of the economy. Do you think that the Fed is worried about economic growth more from the business side of business or from the consumer side of business?
GIRARD: Well, I think that the Fed is just focused overall the pace of growth. You know, we are at levels now with the unemployment rate where it is, almost at full employment, (INAUDIBLE) utilization is very high. So if you continue to grow at 3.5 or 4 percent, you`re going to see pressures on resources. That means commodity prices are going to get bid up because resources are scarce. We`re going to pay more for workers to get the workers we need. The end result will be higher inflation. I think that`s what the Fed is very focused on in here.
GHARIB: So Mike, do you agree with that? Is inflation still a risk for the economy?
HOLLAND: Not completely. I think the globalization situation that we`ve been experiencing for the last several years has introduced a new element to this. We have had incredible increases in this incredible energy situation for the last few years and we have had virtually no core inflation spike as a result of it. The Fed referred to that today. We have commodity prices -- copper and other things that have gone off the charts in terms of price increases, and globalization, the price pressures from around the world, has kept things down. So I`m not sure that growth by itself is anything to fear. In fact, it may be something that`s helping to keep down inflation.
GHARIB: And we`ve seen, in terms of the housing sector with recent numbers, that that`s beginning to cool off and certainly higher interest rates are going to slow it down even more. So that`s not going to be fueling inflation. What do you guys think about that?
GIRARD: Well, I think the housing sector is starting to cool gradually. That`s usually what happens this late in the cycle. The interest rate-sensitive sectors of the economy begin to slow, and other sectors pick up the slack. As you referred to, Susie, I think the business sector is going to play a big role in growth in 2006. We have already seen more hiring. We`re seeing more capital spending. I think that`s going to pick up a lot of the slack.
GHARIB: We have a minute left. I want to ask each of you a quick question about today`s Fed meeting from the point of view of style. We know that Ben Bernanke wants to put his own handprint on the Fed. From what you`ve seen so far, how this meeting was handled, what can we expect from Bernanke, Michelle?
GIRARD: I think he`s going to try to be more transparent. We saw hints of that today. But I think the biggest thing with the lack of language change is that he does want to have continuity with the prior of (ph) with what Greenspan did. I don`t think he wants to be too different out of the chute.
GHARIB: Mike, new chairman, three new Fed governors, but is it still a Greenspan Fed?
HOLLAND: So far, yes, and I think the concern is that the mistake that was made by the Greenspan Fed in `99-2000, may be repeated. The only change that I saw of significance was the three still photographs that we saw a few seconds ago.
GHARIB: OK, fair enough. Mike, Michelle, thanks a lot. Appreciate it.
GIRARD: Thank you.
GHARIB: We`ve been speaking with Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland and Company.
