Michelle Girard, Senior Economist at RBS Greenwich Capital Management & Mike Holland of Holland & Company React to Interest Rates
Thursday, June 28, 2007
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SUSIE GHARIB: The Federal Reserve held interest rates steady again and stocks on Wall Street barely changed after a jumpy day of trading. Fed policymakers wrapped up a two-day meeting in Washington, opting to keep short-term interest rates at 5.25 percent. Even though the Fed is comfortable with the economy right now, experts say inflation still poses the greatest risk. Suzanne Pratt explains.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Federal Reserve has now left short-term interest rates unchanged for eight straight policy meetings. Today's unanimous decision came as no surprise to Wall Street, as the economy is considered healthy and inflation is still fairly well contained. Morgan Stanley strategist David Greenlaw says the Fed has good reason to sit tight.
DAVID GREENLAW, CHIEF U.S. FIXED INCOME STRATEGIST, MORGAN STANLEY: The core inflation numbers have gotten better and the growth picture has gotten better. So why step in and start altering policy if you are seeing movement towards the objectives that matter?
PRATT: There were some changes to the statement that accompanied today's decision, mostly new commentary regarding inflation. Policymakers said quote, readings on core inflation have improved modestly in recent months. However a sustained moderation in inflation pressures has yet to be convincingly demonstrated, end quote. Bear Stearns economist Conrad Dequadros says that means policymakers are still very concerned about inflation.
CONRAD DEQUADROS, SR. ECONOMIST, BEAR STEARNS: Probably the most significant thing in terms of changes was the fact that they do acknowledge that the inflation data has improved, but they're making it clear that this improvement is not enough for them yet to be comfortable with the inflation backdrop.
PRATT: The Fed did, however, remove language from previous statements which described core inflation as elevated. Some economists considered that change in the Fed's assessment of inflation as today's only real surprise. Others noted that policymakers made no mention of sub-prime mortgage problems, which recently have put financial markets on edge.
DEQUADROS: There's really no need for the Fed to address this in their policy statement. I think what that would do would maybe bring on undue concern about the financial markets. I don't think that that's necessary. People would be concerned that the Fed knows something that the markets don't.
PRATT: Friday marks exactly one year to the day when the Federal Reserve last hiked short-term interest rates. A growing number of Fed watchers now believe it could be another year before the Fed moves off the sidelines. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
SUSIE GHARIB: More analysis now on that Fed decision to hold interest rates steady. Joining us, Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland & Company. Hi, Mike, hi, Michelle.
MICHELLE GIRARD, SENIOR ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Hi, Susie.
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Hello, Susie.
GHARIB: Michelle, let me begin with you, the Fed has been on hold now for 364 days. How much longer before it takes some action on interest rates?
GIRARD: Well, perhaps at least another 150 days. I mean I don't think even those of us who are thinking policy could change that it's something that is likely to happen in the near term. We continue to have sort of this offset where the growth story is improving though there are still risks. And the inflation story is getting better but there are still risks. And so until things sort of break one way or the other, I think the Fed is going to stay sidelined.
GHARIB: Mike, it seemed like the Fed was saying the economy is doing better than we thought and inflation is not as bad as we thought. Did anything they said today change it for you, change your view?
HOLLAND: No, I think it was a relief that the Fed as Michelle just said grudgingly acknowledged that inflation has actually improved from the last time that they warned us about it. And I think that anyone who is trying to sell a house right now or sell a used car can tell you that's a reality in the real world. And I think over the next several months as the economy continues to slow down a little bit in the U.S., in some segments that are related to construction, they will have more reason to expand those comments that Michelle just referred to.
GHARIB: Michelle, what exactly do you think the Fed needs to see on inflation so that it is convinced that inflation is moderating?
GIRARD: I think it needs to see more of what, you know, the pattern that we've seen in the last couple months which is relatively low on monthly gains. It's interesting because from what they say, it isn't clear what they ultimately need to see in that they did take out the word elevated. Last time they had said inflation is elevated. That's not the case any more. But you don't know if the year-over-year inflation rate held around 2 percent at the upper-end of the range, if that over a several month period would be good enough or if they need to actually see inflation fall toward the lower end of that range, and the midpoint maybe around one and a half. So I think among the committee, there is some debate about what would actually constitute stress. And in that sense I don't think we can know for sure, but we clearly need to see continued very benign low readings on inflation at the very least.
GHARIB: And Mike, it seemed like investors also didn't know quite how to interpret what the Fed's feeling was on interest rates. And we saw the market being very jumpy trading today. What is your take on where the markets go between now and the end of the year?
HOLLAND: I think both the economy and the stock market Susie have, as I said before with you and Michelle, the two of them have done well despite the Federal Reserve. At 5 1/4 percent for the Federal funds rate, Paul Kangas referred to the 10-year Treasury closed today at 5.11. The Federal funds rate is above the 10-year Treasury. The Fed to my mind is tight and despite that the economy is -- I think in the next few weeks, we're going to begin getting new rounds of earnings. My guess is once again U.S. corporations will have done so much better than people suspect. That will once again help to move the stock market in a positive direction despite the Federal Reserve's tightness which I think is misplaced.
GHARIB: All right. You think that their tightness is misplaced because you think they should be cutting rates at this point?
HOLLAND: They are too high now, yes.
