Analysis of the Fed's Rate Cut with David Jones of DMJ Advisors & Mike Holland of Holland and Company
Wednesday, October 31, 2007
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SUSIE GHARIB: More analysis now on that Fed decision to cut interest rates today. Joining us is David Jones, a veteran Fed watcher and chairman of DMJ Advisors and Mike Holland, Chairman, Holland & Company. Good evening, gentlemen.
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Good evening, Susie.
DAVID JONES, PRESIDENT, DMJ ADVISORS: Good evening.
GHARIB: David, let me begin with you. Was the Fed decision to cut rates by a quarter point the right thing to do?
JONES: It was the right thing to do, Susie. Remember back in September, we had a half a point cut. We had another quarter point cut, both aimed at cushioning the economy from that credit crunch which had increased the cost of credit to most everyone. So the Fed is doing exactly the right thing. I think they may pause for a while here, but those two rate moves were exactly what the doctor ordered.
GHARIB: Mike, do you agree with that?
HOLLAND: Yes, Susie, I'm actually going to surprise you. For someone who has not been uncritical of the Fed, I think as David said, they got it exactly right, not only their actions, but also the commentary that came with it which was that they remain wary of inflation while watching that the economy doesn't weaken too much and they are prepared to act in either instance. And I think that's exactly why we had such a strong ending to the market today as Paul Kangas just said.
GHARIB: So, David, is economy out of the woods because of the Fed actions over the last couple of months and is the financial system back to normal?
JONES: The financial system is not back to normal. It's doing a little better than it was in the midst of that credit crisis, but it's not completely out of the woods. I think what the Fed has done though, has given us an insurance policy against a recession. I do see slower growth in the fourth quarter of this year, maybe even slower growth than that in the first quarter of next, but we had a great third quarter number as was just talked about earlier in the show. So I think in general this economy is going to avoid a recession and we're going to give credit to the Fed for that.
GHARIB: Mike, you mentioned about Wall Street and the market. Yes, stocks did rally, but they initially sold off and there appeared like there was some disappointment with what the Fed's action was. What is the thinking on Wall Street right now?
HOLLAND: I think there was a small cadre of people who wanted an even larger decrease, a 50-basis-point decrease, one half of 1 percent. But that didn't make any sense. I think as much attributed to the decline was people who had been anticipating this, buy on the rumors, sell on the news, is the old Wall Street cliche. But I think one of the things that happened today with the commentary was that the Fed kept the door open to a further cut and I think a the lot of people would expect if not in December then the first part of next year, which gave again, some positive momentum to the stock market.
GHARIB: Let's talk a little bit about the future, David, by reading the statements on the Fed and its concerns about inflation. A lot of Fed watchers are saying that they don't expect the Federal Reserve to cut interest rates any more for a while. What is your thinking?
JONES: I think that's exactly right. I do not expect another cut at the December 11 policy meeting. That's the last one this year. I think the Fed will wait it out, see how the economy looks, see how much the markets are recovering from that credit seizure that they had. I do think, however, that the Fed will have to give us perhaps one more quarter-point cut. Maybe it will come at the first meeting next year, the January 29-30 meeting. Again, the Fed is playing this exactly right. The balance between downside risk to the economy, upside risk to inflation are about equal and that's exactly the way the Fed should look at it.
GHARIB: Mike, you said that Wall Street wanted to have a bigger cut. Yes, Wall Street loved a rate cut, but easy money is what got us into this mess. I mean, how can easy money be the cure?
JONES: Well, I don't think the majority of people on Wall Street were looking for something larger. As I said a small cadre of people probably were disappointed there wasn't a half a basis point, a half a percentage point. I think, however, Susie, that overheating or -- if it had been more or less than the 25 basis points, the majority of people who trade on Wall Street would have been surprised and disappointed. There would have been - - I think people have been concerned if there had been more, a lot of people and certainly if there had been no action, if they had done nothing, stood pat, there would be a huge decline there. So I think they did -- to use David's word, they did it exactly right. I think, however, there's more to go. I think David underestimates what people might be thinking the Fed is going to be doing. More than one quarter of 1 percentage point right now.
GHARIB: We're going to have to leave it there, gentlemen. Thank you so much for coming on the program. I appreciate it.
HOLLAND: Thank you, Susie.
GHARIB: My guests tonight, David Jones, chairman of DMJ Advisors and Mike Holland of Holland and Company.
