Michelle Girard Senior Economist at RBS Greenwich Capital & Mike Holland of Holland & Company Analyze The Interest Rate Reduction
Wednesday, October 29, 2008
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SUSIE GHARIB: Joining us now with more analysis, Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland and Company. Hi, guys.
MICHELLE GIRARD, SR. ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Hi, Susie.
GHARIB: Michelle, let me begin with you. You told clients today that cutting interest rates -- I'm going to quote you -- is a side show to fixing the economy. Are you saying that Fed rate cuts just aren't as important as they used to be?
GIRARD: Well, that's true. I think in terms of the economy, their impact is more marginal. It has an effect, but it's much smaller than the effect that all of the other action the Fed is taking is having. I mean, Suzanne noted it in her report. We have the Fed just flooding the markets with liquidity to help out the banking system and sectors of the credit markets that are struggling. And ultimately helping to stabilize the financial markets is the best thing that can be done to get the economy on a more stable footing.
GHARIB: Mike, do you agree with Michelle?
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Yeah, Michelle's point is very well taken if you just look at the Fed's own balance sheet, if you will, Susie. During the past 12 months, that balance sheet has actually doubled. All of these things they've been doing, they have made their balance sheet twice as large as it was one year ago. That balance sheet, our Federal Reserve balance sheet, which is essentially what we own as taxpayers, is 13 percent of the GDP of the United States. So we have done massive things through the Federal Reserve. I think as Michelle says, this is a side show. All these other things they have been doing have been far more important and 1 percent. Who cares? But these other things have been extremely important, very imaginative and they've started to work. Michelle, I would be interested in your saying in the last several days here that the credit markets have become to come unclogged.
GIRARD: We actually, Michael are, starting to see some of that. You know, we talk about some of these rates that banks charge each other starting to come down. The really important thing here is that there has been a shift in what the Fed is doing. They can either target the price of money, which is the Fed funds rate or the quantity of money and very quietly, I think, unbeknownst to a lot of people, that's what they've started to do is focus on how much money they're supplying and less on a target. They may say they're selling money one at 1 percent, but in truth, in the marketplace, banks are able to buy it much more cheaply.
HOLLAND: Susie, if I could just add to what Michelle just said. In Japan, where we had a little bit of a preview of coming events during their crisis a decade ago, they did a lot of targeting of interest rates, not until they did just what Michelle talked about, which is use the money supply, a quantitative liquefying measure, did they get out of their morass. Our guys have moved more quickly and they're doing it right now.
GHARIB: Actually what I was going to say was picking up on the same Japanese model and I want to toss this out there for discussion, is there any risk of the interest rates getting down below 1 percent or to 0 percent. Any risk to them dropping that low, Michelle?
GIRARD: I think they could and really effectively, that's what they're doing now. They've got something in place. They're paying interest on reserves to banks, which is helping to keep what appears to be the level of rates in the marketplace at 1 percent, but effectively, if they weren't doing that, we'd be at zero. So really, going to zero would not change what they're doing behind the scenes, which is basically flooding the system with reserves, with the quantity of reserves, just like was done in Japan.
GHARIB: Let me switch gears a little bit --
HOLLAND: I'm sorry, go ahead.
GHARIB: I was going to switch gears just one moment because we're running out of time. I want to ask you about the markets. Investors wanted a rate cut. They got a rate cut. The Dow sold off. So what's all that about?
HOLLAND: You're talking about the stock market, obviously. And the stock market is-- we're still in a bear market. We had an 11-point -- 11 percentage point move to the upside yesterday. We gave back just a tiny bit of that today. But there's no question, with the slowing economy, we're in a bear market. We can come out of it at any time, but it isn't yet as we saw, in the last half hour today, the last 15 minutes today.
GHARIB: So Michelle, do you think that the GDP number that comes out tomorrow will change market sentiment at all?
GIRARD: Well, it might. One of the things that I think is that we could get a positive number but I think you cannot be fooled. If you strip out inventories and trades the number is going to look weak, and I think that's going to spook the markets and I think near term, the economic numbers are going to look very weak, particularly next week's employment report.
GHARIB: All right, guys, thank you so much, always a pleasure to have you on the program. We're going to have to leave it there. My guests tonight Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland & Company.
