Analysis of Unchanged Interest Rates With Michelle Girard, Senior Economist at RBS Greenwich Capital Management & Mike Holland of Holland and Company
Tuesday, December 12, 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. Hi, guys.
MICHELLE GIRARD, SENIOR ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Good evening.
GHARIB: Michelle, let me begin with you. This is four straight meetings now that the Fed has held rates steady. Do you think that the Fed is on permanent hold?
GIRARD: Well, I do think that they're on hold well into 2007. You know, there are two dynamics at work here which I think argue for the Fed not to do anything. You do have the economy that is growing more slowly, as they acknowledge, because of the substantial cooling in housing. On the other hand, inflation is uncomfortably high, so any, I think, speculation about the Fed cutting interest rates in response to economic weakness is extremely premature. Their hands are sort of tied and so I think it's a one or the other of these sort of dynamics becomes more compelling, the Fed is likely to just sit and wait.
GHARIB: Do you agree with that Mike? What's your take on today's Fed decision?
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: It's interesting to see the markets actually are saying the opposite of what Michelle very common sensibly just talked about. The fact is, the markets are saying they believe the Fed is going to drop interest rates in the not too distant future. And the bond market particularly with a 4.5 percent 10-year Treasury, that's an indication that the bond market also believes inflation isn't a problem. So I think it's interesting to see how disparate the markets are with respect to what Michelle just said, which I think is what the Fed is saying.
GHARIB: Tell us a little bit, Mike, more about the market reaction today, because before the announcement, the Dow and the NASDAQ were down. After the announcement, they were still down but not as much. Tell us more of what you see the message is here.
HOLLAND: OK, very -- this is a little inside baseball here, Susie, but the inside baseball reaction was there are a couple of comments there that the market, the stock market viewed as somewhat dovish, meaning that they might, in fact, fulfill the dreams of the people who expect them to lower rates in contrast to what Michelle was just talking about. That helped a little bit, certainly helped in the bond market. Michelle would probably agree with that.
GHARIB: Right. Michelle, let me pick up on what you said that was mentioned in the statement, that the Fed said that the economy has been slowing because of a substantial cooling in the housing market. A number of people have come on our program recently who I've interviewed have said that they're beginning to see the bottom of this housing slowdown. If they're right and home buying picks up, so where does that leave the Fed? Will they have to raise rates?
GIRARD: Well, that's interesting. That is sort of what we're picking up anecdotally. I mean it may be too early to say there's a bottom, but it seems like as prices have adjusted lower, we're getting interest from home buyers dipping their toe back in the water and so you are hearing that maybe the demand side of the equation is bottoming out. I think that housing is going to be a drag on growth until probably the middle of next year at the earliest. But beyond that, we do think growth will get back to trend. And then the question for the Fed will be if inflation is still above their comfort zone and now the economy is kind of back on solid footing and therefore the prospects for a further deceleration in inflation look pretty limited, does the Fed come in and take action to get inflation down further? Ultimately we think that's what will happen.
GHARIB: What is your firm's position Michelle on inflation in 2007? Where is it going to settle?
GIRARD: Well, we do have it topping out in the first quarter at around 3 percent on the CPI, a little bit lower on the core PC deflater. And it will gradually head down. But the Fed wants it to be, say, between 1.5 and 2 percent and we don't think it's going to get there by the end of 2007. We still have it close to -- just under 2.5 percent. So that's why I think the Fed won't tolerate that and will ultimately come in and take action to get inflation back down in the zone it wants to see it.
GHARIB: Mike, given what we've been discussing here, have you changed your investment strategy at all and then also, what is your outlook for the stock market for 2007?
HOLLAND: First question first, Susie. No, I haven't changed my outlook or my actions whatsoever. The best news for me is what Michelle was just talking about and that is the Fed will do nothing for a long period of time. They've made some mistakes in the past that have caused investors a lot of pain and it looks as if they probably aren't going to do that irrespective of where we think they're going to eventually move. So that's number one. Number two, the stock market right now, Jeffrey Immelt this morning from GE, the CEO of GE spoke about the possibility of 12, 13 percent growth in GE's earnings next year. The reason I mention that is because 2007 GE is a good indicator of what world economic growth. If he's looking at a book of business that looks like that, I think that the holiday cheer for people may be that we are looking after a good year in the stock market, another decent year in the stock market if the Fed doesn't screw it up.
GHARIB: All right. That's a good forecast. Thanks a lot, Mike. Thank you, Michelle. We've got to leave it there. We've been speaking with Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland and Company.
