Michelle Girard of RBS Greenwich Capital Management & Hugh Johnson of Johnson Illington Advisors Review the Interest Rate Reduction
Tuesday, September 18, 2007SUZANNE PRATT: Joining me now with reaction to today's big Fed decision is Michelle Girard, senior economist at RBS Greenwich Capital Management and Hugh Johnson, chief investment officer of Johnson Illington Advisors. Welcome back to NIGHTLY BUSINESS REPORT to both of you.
MICHELLE GIRARD, SENIOR ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Hi Suzanne.
HUGH JOHNSON, CHAIRMAN, JOHNSON ILLINGTON ADVISORS: Nice to be with you.
PRATT: Michelle, let's start with you. Do you think that the Fed got it right today?
GIRARD: Well, you know, in hindsight it looks like they got it just right given the very positive reaction that we saw not only in the stock market, but in the various credit markets where liquidity has been an issue. We had only been expecting a 25 basis point cut. But I think the more aggressive action which may ultimately mean that they end up cutting less than what otherwise had been necessary if they'd moved more slowly, it may turn out to be just the right medicine.
PRATT: Clearly, the market thought that the Fed got it right. Investors cheered the move today. Why do you think they reacted that way?
JOHNSON: Well, I think quite frankly, that everybody, obviously the Fed, but everybody was a little concerned that changing credit market conditions, the credit contractions, so to speak, was going to have a serious impact on the economy and that the Fed might not do enough to prevent that. So I think this sends a pretty clear signal that the Federal Reserve is not going to sit on the sidelines. They are going to be very, very involved and they are going to do enough to prevent a recession. I think, quite frankly, the message of the markets today is they've done, they have taken a strong step and that they will - that will help to avoid a recession. So, believe me, the message of the markets was very, very positive for the outlook for the economy.
PRATT: Michelle, do you think, though, that today's Fed rate cut is really about mortgage rates that are resetting or does the Fed see something that the rest of us don't see, like a recession, perhaps?
GIRARD: I don't think that they see a recession. I mean one of the things that was evident in the statement is that they really didn't appear to be altering at this point their outlook for growth. But they are acknowledging that the downside risks have increased. That's what they are trying to prevent, by taking aggressive action today to offset the impact of the financial markets on the economy to ease some of the burden of adjustable rate mortgage resets, as you pointed out. All of this will put the economy on a better footing in the fourth quarter and again, it will help to mitigate some of the downside risk which has really risen in recent weeks.
PRATT: Hugh, don't you think there is a danger that tomorrow morning when investors wake up, they're going to reevaluate what happened today and they are going to say hey, you know what, maybe the Fed knows something that we don't know and maybe it's that a recession is coming?
JOHNSON: I don't think they're going to reach that conclusion that a recession is coming, quite frankly, but they probably reassess and I think what they are going to reassess is we had this enormously emotional reaction, a response in the equity markets. That might have been not only emotional, but it might have been a little bit too emotional. So I think, yes, they will reassess. I think what you will see is we'll give back some of the gains that we had in the stock market today, a more sober assessment of what the Federal Reserve did and what the outlook for the economy now and you will see some changes in other things that reacted. Volatility will pick up a little bit tomorrow. So I think, yes, that will give up some of those euphoric gains that we had today.
PRATT: Hugh, do you think that because of what the Fed did today that people should change their investment outlook? Are you changing your investment outlook?
JOHNSON: No Suzanne. You know, I remain bullish or had bullish structured portfolios throughout this whole financial crisis, if we can call it a crisis. The reason for that is because the messages coming from the financial markets have been worrisome, but they haven't been strong enough to tell me that we have to change from a bull structure and portfolios to a bear structure and portfolio. So I kept the bull structure and right now, when I'm talking to investors, I say preserve that or maintain that bull structure. Continue to have a full allocation to equities and you may even think about such things as moving a little bit more back toward small and midcap. But don't get off the bull bandwagon quite yet.
PRATT: Michelle, so what happens next? Do we see lower rates in the future?
GIRARD: I think it's going to depend how the economic data really look over the next several weeks. The Fed themselves aren't sure and they've left themselves with a lot of flexibility. The debate on it - one economist right now -- are we headed for a recession or is the impact on the economy not going to be as great? We're in the more optimistic camp, but under that scenario, we may get another rate cut in October. But that could be it. I think the Fed is going to feel their way along here. If the data looks like they are stabilizing, the economic fallout is minimal, then they probably don't have a lot of additional rate cuts to come. But they are going to be watching, same as us, as the economy and the data unfold in coming weeks.
PRATT: Hugh, the last question to you and we just have a few seconds left. Usually after the Fed starts an easing cycle, the market does very well. Do you think that's the likely scenario this time?
JOHNSON: Well, that's the way I'm positioned and that's the way I'm also sort of hoping and keeping my fingers crossed. I think the outlook for the economy and earnings is great. Let's just say good, not great. I think good enough, certainly, that the bull market should be sort of resumed. And so I think, yes, I think stock prices will be higher six months from today than they are today and that's why I'm recommending a bull structure.
PRATT: OK, let's leave it there. Thanks to both of you.
GIRARD: Thanks Suzanne.
PRATT: My guests this evening, Michelle Girard and Hugh Johnson.
