Money Managers Analyze Unchanged Interest Rates
Wednesday, October 25, 2006SUSIE GHARIB: Joining us now for more analysis of today's Fed decision to hold interest rates steady, Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland and Company.
Michelle, let me begin with you. As we know, it was expected that the Fed would be on hold for another meeting. But was there anything that stuck out from today's meeting? Anything new?
MICHELLE GIRARD, SENIOR ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Well, you know, as was mentioned earlier, there weren't many changes to the statement. I do think that the Fed tried to signal that they, perhaps, think that the moderation in economic activity has started to slow, that going forward, they think that the pace of growth will be steady, but there really weren't any changes which provide a lot of insight as to what we're going to see from the Fed between now and year-end and even into early 2007.
GHARIB: Mike, how about you? What was your take on today's announcement?
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: I was delighted with the action or no action of the Fed. I think Erika Miller's comment a few minutes ago, their wording was virtually unchanged. To the stock market and bond market, that was just what it wanted to hear, each of those wanted to hear and both of them, as Paul Kangas just said, rose in price.
GHARIB: Michelle, a former Fed governor was on our program last night and he said that the inflation rate of 2 1/2 percent as far as the Fed is concerned is too high;; it's unacceptable. So what do you think is the Fed's game plan here?
GIRARD: That's really, I think, one of the reasons why we keep seeing the Richmond Fed president dissenting. He wanted to raise interest rates today and the reason is because the current level of inflation at 2 1/2 percent is about a half a percentage point higher than the Fed sort of implied target range of 1 to 2 percent. And so he wants to take further action to bring the inflation rate down. I think the Fed is going to cool its heels here. I think they're going to wait and see how the economy fares but, if growth doesn't slow sufficiently to help bring those inflation numbers down, then I think in 2007, the Fed indeed may take further action.
GHARIB: And by that you mean raise rates?
GIRARD: In terms of raising interest rates, right, to help to relieve it in some of the inflation pressures.
GHARIB: As you heard Mike from our report, that's the whole debate, what's the Fed's next move going to be? Where are you in this, rate hike or rate cut?
HOLLAND: I think the Fed has no business making a move in either direction until we get a significant change one way or the other from here, which means, I think, for most of the voting Fed members with the exception of Mr. Lacker, that they will do nothing until maybe next spring, next summer at which point my guess is -- my guess is we will have a decline and they will reduce rates. I think we are going to be surprised at how benign inflation is. Inflation numbers continue to be good around the world.
GHARIB: Let's just say, Michelle, that we see the economy grow much faster. I know on Friday, we are expecting a weak GDP report, but let's say by early next year, the GDP, the growth in the economy is coming in at 4 percent.
GIRARD: Right.
GHARIB: Would that be the trigger for the Fed to raise interest rates?
GIRARD: Yeah. I mean, Susie, you are right. First of all, like you said, we're going to get a weak third quarter number, but the fourth quarter number is probably going to look a whole lot better, in large part because, as a result of the decline in gasoline prices, it looks like it's going to be a pretty good holiday shopping season and we don't even have to get 4 percent growth next year. The Fed needs to see the growth rate hold below, say, 3 percent potential GDP rate. If it's not growing slower than that, you are not going to see dollar pressure on inflation. And so I think even if you see growth in the 3 to 3 1/4 percent range, I think that's going to be a good healthy debate about whether or not further tightening action should be taken.
GHARIB: How about the market reaction today, Mike? It doesn't seem like there was much debate there?
HOLLAND: The market got exact what it wanted to get. I think as Paul Kangas said a little while ago, the market was actually down going down into the announcement at 2:15. It was worried about a bad outcome from the Fed, either some action from one of the other dissenting governors or even some words, in which case we would have had some problem with all the markets today. We had just the opposite. Ben Bernanke is in dire trouble looking as if he is completely reasonable. The markets are getting very comfortable with him. And if have to say that if growth causes inflation, then China should have 5 percent inflation. The Fed is talking about I think money supply around the world is tight and I think we're going to get surprises going into next spring and next summer, that inflation doesn't go anywhere with growth as Michelle just said in the fourth quarter looking very good.
GHARIB: We just have 30 seconds left. What's your overall outlook for the market? Some people I have been talking to say if he Dow peaks between now and election day.
HOLLAND: Michelle, go ahead.
GIRARD: I think the bond market is going to be seeing upward pressure in yields because I think the economy is going to surprise the markets with the strength in the near term.
HOLLAND: Susie, I think the stock market is going to be at new highs at the end of the year.
GHARIB: All right. I hope you are right about that. Thank you both, Mike and Michelle for coming on the program.
GIRARD: Thanks, Susie.
HOLLAND: Thanks Susie.
GHARIB: We've been speaking with Michelle Girard of RBS Greenwich Capitall Management and Mike Holland of Holland and Company.
