Analysis of the Unchanged Interest Rates with Michelle Girard, Senior Economist at RBS Greenwich Capital Management & Mike Holland of Holland & Company
Wednesday, March 21, 2007
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SUSIE GHARIB: More analysis now on that Fed decision today to hold interest rates steady. Joining us this evening, Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland and Company. Hi, Mike. Hi, Michelle.
MICHELLE GIRARD, SR. ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Hi, Susie.
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Hi, Susie.
GHARIB: Mike, let me begin with you this evening. The Fed says it's worried about inflation. The Dow jumped 160 points. Why do you think the markets rallied today?
HOLLAND: Well, first of all, Susie, let's be clear. The Fed is always supposed to be worried about inflation. The markets would be in a crazed mode if they didn't say exactly that. What they did was they said they got rid of their bias toward raising rates. That's a huge, huge move and it was a surprise in both the bond market as Paul Kangas said and the stock market greeted it very merrily.
GHARIB: Michelle, what do you think the Fed was saying today? It seems like there's a lot of confusion on the different interpretations.
GIRARD: We are sort of arguing semantics. I don't know if I would go so far as to say they've removed their bias because they did reiterate that their predominant policy concern remains higher inflation. But they certainly softened their bias taking sort of a baby step, if you will, toward neutrality and I think that's what was well received in the marketplace.
GHARIB: Mike, what surprised you most about today's statement or any comments from the Fed?
HOLLAND: Well, with all due respect to the people who we spoke before about this not being that significant, they eliminated the whole section, eliminated the section that they had used in the previous statements for the last several statements that their bias was toward firming, toward increasing rates. It's absolutely gone. And the Fed moves slowly. They prepare the markets well in advance of changes. My sense is that this is a preliminary indication that if we continue to get a slowing in the economy, which we're getting, FedEx reported today a very good economic indicator. Their earnings were disappointing because they said the economy is slowing. To the extent the economy slows and inflation doesn't get crazy, I think we'll have a cut in the future, not an increase.
GHARIB: Michelle, let's say six months from now are we going to be talking about the Fed being worried about inflation or about a recession?
GIRARD: I think we're going to continue to hear the Fed's worries about inflation. Again, they continued to say that that is their biggest worry, that inflation isn't going to slow as much as they think it will. And I think as a result, the market is sort of getting ahead of itself with all this speculation about rate cuts. I mean at the moment the market is priced for, you know, two rate cuts by the end of the year or into early 2008. I don't think the Fed meant to go that far at this point. I think it all depends in six months it depends on how the economy -- look, I disagree with Mike though in the sense that I'm more optimistic about the economy. I think the economy is going to be looking better by the middle of the year if the housing drag diminishes and inflation is still going to be firm.
GHARIB: So are you saying then, Michelle, that you think there's going to be a rate hike down the road?
GIRARD: I think that that is certainly a possibility by late 2007 perhaps if Bob's forecast is right. I guess I feel more confidence that we won't see rate cuts. If the Fed doesn't hike, I think the best guess is that the Fed policy is neutral. I still think the hope for a rate cut is pretty high given that inflation is still elevated. Again I think you'd have to see the economy weaken up pretty sharply in here for the market.
GHARIB: Let's get Mike in on this conversation because this is the first time I've seen you two disagree. Mike, what do you think?
HOLLAND: I disagree. Let me be clear that I don't think the economy is in bad shape whatsoever. I think we're simply having a slowing of the four years of double-digit growth that we had in earnings in corporate America. We're going from a 3.5 percent growth to 2.5, 3 percent growth. If that is all that we get, we get the soft landing that the Fed has wanted, if we get that, if we get that -- and I think there's a good chance we will -- we then have a 5.25 Federal funds rate which I consider to be too high. The bond market says it is too. The bond market is at 4.5 percent. The Treasury market is 4.5 (ph). It says it's too high.
GHARIB: All right, we have just a little bit of time, two quick questions. Mike, first, are you changing the way you're investing because of what the Fed said today?
HOLLAND: No. I'm just delighted the way I'm invested. Thank you very much.
GHARIB: OK.
HOLLAND: Fully exposed to stocks. Thank you.
GHARIB: Michelle, what's the most important economic data for investors to be watching between now and the May 9 meeting?
GIRARD: I think you want to watch the jobs data. As long as people are working and earning money, then the consumer spending numbers which are two-thirds of the economy will hold up well no matter what housing is doing.
GHARIB: We're going to have to leave it there. Thanks a lot both of you. Appreciate it.
GIRARD: Thank you.
GHARIB: My guest tonight Michelle Girard of RBS Greenwich Capital Management and Mike Holland of Holland and Company.
