Michelle Girard of RBC Greenwich Capital Management & Mike Holland of Holland and Company Analyze The Latest Rate Cut
Wednesday, January 30, 2008
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SUSIE GHARIB: Joining us with more analysis Michelle Girard, senior economist at RBC Greenwich Capital Management and Mike Holland of Holland and Company. Hello to you both.
MICHELLE GIRARD, SR. ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Good evening.
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Hello, Susie.
GHARIB: Michelle, let me start with you, two big rate cuts in just eight days. Is this an admission that the economy is in serious trouble?
GIRARD: Well, I think there is some acknowledgment. We've heard that from Fed Chairman Bernanke even as early as the second week of January that they are much more concerned about the economy given the fact that financial markets really remain so volatile. And so what you've seen here is, I think, a real shift in Fed strategy to be much more aggressive and front-loading stimulus to the economy. And I think also there is a much heightened degree of sensitivity to the financial markets. You know, when the financial markets were very rocky last week, they moved inter-meeting. The markets were looking for a 50 basis point cut today. They didn't want to disappoint. So I do definitely sense that in the early 2008, the Fed has shifted their approach and their strategy.
GHARIB: Mike, you've been critical in past appearances on the program of the Fed not being aggressive enough. Are you feeling more comfortable now that the Fed is in control and that maybe it can solve the problems and get the economy growing again?
HOLLAND: A huge yes, Susie. I couldn't be more constructive about what they've done over the past several days and more important than what I feel or what I would say is what the markets themselves -- and it's not just the stock market. It's the credit markets. The financial markets generally last August began having serious problems. There was even a phrase they were seizing up. And we've had a couple of bouts of that ever since then. The Fed belatedly but correctly has identified what the markets have been talking about. This is very good for the economy. For the viewers they should sleep better tonight knowing what the Fed has done over the last several days.
GHARIB: Michelle was just talking about that this is what the markets want. I want to ask both of you, who is making the decisions here? Is it being determined by the needs of the economy or is it Wall Street?
GIRARD: Well, I have to say that's one of the criticisms that we've sort of had about the Federal Reserve this month, is the actions look very much beholden to the markets. And I have to say our expectation about further rate cuts is less viewed on the fact that we think the economy needs it and more based on the fact that the markets are going to demand it. I just said, just seems to want to be not disappointed. To some extent I think they're being criticized for being led around a little bit by the financial markets.
GHARIB: Mike, what do you think?
HOLLAND: I kind of disagree a little bit with how Michelle - but Ben Bernanke -- and I think you might have been there, Susie -- last June gave a speech in which he predicted this kind of action. What he said was that when we're moving into the down part of a cycle, the business cycle, the economic cycle, which most people in the country would view that we're probably in after several good years that in fact when you have the financial markets including the stock market going down, it accelerates the downturns. That would only make sense. People who don't know a lot about the stock market would tend to agree that makes sense. The last time the Federal Reserve abandoned that idea was in the 1930s. Andrew Mellon secretary of the Treasury at that time told Herbert Hoover, don't worry about the stock market. Don't worry about house prices. Let it go down. It will clean the system. We know what happened our economy's clock got cleaned at that time. So I think Ben Bernanke has looked at history. He's addressed it and he's done exactly the right thing.
GIRARD: Michael, the only problem is the markets always swing to extremes. You know, we've seen, you know, the bond markets, it's been pricing in with a steep recession even though the economic data don't support it. Maybe the markets will be proven right. Maybe the Fed knows something that we don't know. But to date there really isn't the evidence supporting the dramatic decline in economic activity that the markets seem to be betting on. At some point I think, you know, the markets can get ahead of themselves and the Fed focus too much on that it could be problematic.
HOLLAND: You're exactly right, Michelle. In fact, the durable goods orders this week, the big companies who export big things have been doing very well. The consumer, the people watching this show, have not been doing well. That's two-thirds of our economy based on that. The Fed has anticipated a problem. The absence of the negative will show that what they did was probably heroic but we'll never know. I hope you're right.
GHARIB: Mike, we just have to wrap it up. What happened with the markets today? They got what they wanted and they sold off?
HOLLAND: Yeah, at the end of the day something bad happened once again. This is to Ben Bernanke's credit, unintended. We actually had a Fitch (ph) rating service downgrade one of the municipal bond insurers. It was very bad for the financial markets. We're talking about billions and billions of problems. If we didn't have the kind of back drop that we have from both the Fed and the stimulus, we'd be in a problem. Something happened late in the day that was very important.
GHARIB: We're going to have to leave it there. Thanks a lot, guys. Appreciate you coming on the program.
GIRARD: Thank you.
HOLLAND: (INAUDIBLE)
GHARIB: My guests tonight, Michelle Girard, senior economist at RBC Greenwich Capital Management and Mike Holland of Holland and Company.
