Transcripts

Interest Rates & Oil Prices Spark Wall Street Rally

SUSIE GHARIB: An explosive rally on Wall Street today as oil prices tumbled below $120 a barrel and the Federal Reserve decided to hold interest rates steady. The Dow surged 331 points and the NASDAQ jumped 64. Investors cheered the sharp drop in oil prices. September crude futures fell $2.24 to $119.17 a barrel in New York trading. Also fueling the rally, the Fed's announcement to keep its benchmark Federal funds rate unchanged at 2 percent. Fed policymakers were mostly united in the vote, with only one dissent. The president of the Dallas Federal Reserve Bank wanted to hike interest rates. Scott Gurvey reports.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Members of the open market committee had been talking tough of late, leading some Fed watchers to believe they would raise rates or at least issue a strong inflation warning. But they left rates unchanged and while their statement did note inflation has been high, it balanced that with the committee expects inflation to moderate later this year and next year and also observed that labor markets have softened further and financial markets remain under considerable stress. Economist Stephen Gallagher of Societe Generale is disturbed by today's statement and concludes it means the Fed is on hold for the foreseeable future.

STEPHEN GALLAGHER, CHIEF U.S. ECONOMIST, SOCIETE GENERALE: The lack of any current guidance is a signal or a reflection of the fact that they're confused and they don't know themselves what's the greatest risks are in the economy. They see both growth risk and inflation risk and right now, they're not sure what policy should be responding to.

GURVEY: In all due respect to critics complaining that monetary policy is either too tight in light of the slowing economy or too loose in light of rising inflation, the Fed actually is facing the kind of insidious stagflation which resists an easy solution. High energy prices, the main inflationary force, appear to be coming down, while the housing slump and credit crisis are expected to continue well into next year. Economist Conrad Dequadros of RDQ Economics observes the Fed is, in effect, easing without easing.

CONRAD DEQUADROS, ECONOMIST, RDQ ECONOMICS: Philly Fed President Plosser has pointed out how negative the real rate is when you take into account the fact that overall CPI inflation is now running at 5 percent. So I think the Fed does judge policy to be accommodative at this point, but they probably think that accommodation is justified given the stresses in the financial system and in the economy. I do think though it risks more dire inflation in 2009.

GURVEY: The Fed isn't the only central bank setting policy this week. Both the European central bank and the Bank of England meet in the days ahead and both are expected to leave their interest rates unchanged. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.