Michelle Girard, of RBS Greenwich Capital Management & Mike Holland of Holland & Company Review Interest Rates With Susie Gharib
Wednesday, September 20, 2006
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SUSIE GHARIB: Joining us now for more analysis of today`s Fed decision to hold interest rates steady, Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland and Company. Hello to both of you.
MICHELLE GIRARD, SENIOR ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Hi, Susie.
GHARIB: Michelle, let`s start with you. Is this pause beginning to look like a stop?
GIRARD: Well, we have seen now, two meetings where the Fed has chosen to keep rates steady, but they did reiterate, as they did in August, that they still see upside risk. So very much along the lines of what the economist in the package said, I think they are still trying to keep in front of the markets the idea that they -- we shouldn`t assume that this pause is it and that the peak in rates has been seen, that they are stillvery much watching the data and if they have to, they will take further action.
GHARIB: Mike, what do you think? Do you expect more rate hikes or is this it?
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY:
I really believe this is it, Susie. I think the economy and its strength is what the package is, as Michelle referred to, talks about, I think and the essence of it is inflation. And inflation, as the Fed has said may be on the abyss of moving down, is moving down around the world. It`s moving down in Canada as the numbers showed yesterday, yesterday`s numbers from china the same way. China is growing at nine or 10 percent and its inflation is at 1 percent. So growth doesn`t cause inflation by itself and I think we`re going to get some great inflation numbers in the future and I think the Fed`s going to be out to pasture.
GHARIB: Let me go back to you, Michelle, with this thought. How unusual is it to see bond yields so far below where the Fed fund rate is? As you know, a lot of people are already talking about rate cuts beginning in 2007.
GIRARD: You`re absolutely right. That is what is so really remarkable, when you look at how much lower market yields are than the Fed fund rates. It tells you that market participants are actually anticipating a Fed rate cut in the relatively near future. You know, this is I think where we disagree most in terms of a lot of speculation in the market. You know, we do think the economy is strong and as was mentioned, the Fed is a long way from having to cut interest rates and so I think ultimately the current level of interest rates in the marketplace is probably lower than would be justified by the economic fundamentals.
GHARIB: Mike, let me ask you, I know you feel like inflation numbers are coming in fine. What do you think -- why do you think the Fed is so focused on inflation risk? We`ve seen oil prices down, as we just reported. And all the inflation reports recently have been so tame. So what`s the worry?
HOLLAND: Great question, Susie because that`s walking the walk and talking the talk, that cliche. They`re supposed to talk as inflation fighters. That`s their job. They supposed to let the world know that they are very vigilant about inflation. When the numbers came in the way they did yesterday and they have been for the past year and as they are coming in around the world, they don`t have to do anything to mess up the economy as has happened in previous regimes. I think they are very aware of theirpotential for causing a recession. I think they don`t want to be in the position of causing it. If inflation continues down, the bond market yield will have been justified. If inflation goes up as Michelle says, the Feds are off.
GHARIB: Michelle, I guess you weren`t too surprised that Richmond Fed President Jeffrey Lacker dissented again and he`s still worried about inflation, but do you think there are other people in the Fed who are concerned about the inflation risk?
GIRARD: I think they all are. You know, the inflation rate now, if you look at the CPI year over year, is at 2.8 percent. The Fed has stated it really wants that level between 1.5 and 2.5. So inflation now is higher than they`d like and we`ve had a couple of monthly changes that are a little bit more contained, but nowhere near the low readings we used to see and I think the Fed is very watchful of this. They are betting that the economy is going to slow enough to take off the pressures that we`ve seen on inflation and help bring inflation down, but whether or not that forecast for slower growth comes true is what they`re watching. And, you know, when you look at energy prices, you`re right, it`s great in terms of inflation, but it`s also going to be very good for the consumer come the holiday shopping season. You know, I think we`re going to see consumer spending move up very nicely in the fourth quarter of this year. So again, I don`t think we`re going to get that slow growth that the inflation risk is going to be removed.
GHARIB: Just to wrap things up, Mike, I want to get your take on the markets. The Dow is about 140 points away from a record high. What do you think is going to be the catalyst behind a move like that and if the Dow does break that record, is it important?
HOLLAND: Yes, and yes. And I think, Susie, the important thing here is I agree with Michelle with respect to the economy. I think the economy is going to be just fine. It`s not going to be as good as it was, but I think it`s going to be fine if inflation remains low. The stock market has been, as we talked about in the past, concerned about the Fed messing things up. The Fed showed today that it is probably in the best of all worlds right now with inflation numbers under control and I think that the numbers that are going to start coming out in the next few weeks, we`re getting next quarterly earnings reports, I think they`re going to be good ones again. So low inflation with good earnings, it`s going to be a good time for stockholders.
GHARIB: OK. It`s getting interesting. Thank you to both of you for coming on the program.
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.
