The Fed Leaves Interest Rate Alone
Wednesday, November 04, 2009SUSIE GHARIB: The Federal Reserve kept its key interest rate unchanged today at 0 percent. The central bank wrapped up a two-day meeting saying it'll keep rates there for quote, an extended period even though policymakers noted economic activity is picking up. The decision was unanimous. The Fed made only small changes in its policy statement, including several comments about inflation, saying it is quote, subdued and stable. The Fed's benchmark rate is used to set the rates for business and consumer loans and has been at zero since December of last year. So did the Fed do the right thing today? For answers, we turned to Mike Holland of Holland and Company and Michelle Girard, senior economist at RBS.
MICHELLE GIRARD, SR. ECONOMIST, RBS: I thought it was very interesting that they didn't change the extended language, but they did state conditions under which they might be willing to change the language and eventually change rates. They said you have to have low resource utilization, low inflation and steady inflation expectations. So those are the key things to be watching here in looking ahead and trying to figure out what the Fed will do and when.
GHARIB: Mike, do you agree with that? Did they make the right decision?
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: They made the right decision, but I thought it was interesting the way Michelle just described it, which I think is exactly what the Fed wanted people to do, which is to look -- they actually put something new in there, but it really wasn't anything new. I think we were aware these are the things they were looking for. Having said that, they did nothing, which is what the markets wanted.
GHARIB: Michelle, let me give you the contrarian view though. Some people say there's too much stimulus in the economy. Inflation is heating up and you're going to have to start raising interest rates soon, otherwise the economy is going to be in trouble. How do you respond to that criticism?
GIRARD: I had a lot of sympathy for that argument. I think we already have signs that the risks are going up that the Fed will over stay their welcome. But this Fed does not want to make the mistakes that have been made in the past by raising interest rates too soon. So they are certainly going to wait through the end of the year, look at how the economy does, how the holiday season goes and how we look in early 2010 and I think at that point, we'll start to hear more about the Fed starting to position for actually hiking interest rates. I don't think the hike will come until June.
GHARIB: Mike, I thought that the Fed was very defensive about inflation. You look at that statement, I think they used the word subdued three times, stable. I mean, they were really making the point. What do you think of the Fed's inflation stance?
HOLLAND: We still have people around the world and in Washington who are worried about deflation, not inflation. So I think that at this point, it's not a surprise what they did. The Fed has two mandates, as we all know. One is for price stability. The other is for the economy and jobs, which was given to them by Congress years ago. They have to worry about this Friday number that's coming out. We're at 9.8 percent unemployment. That number could go to 10 percent. It's the highest it's been since the early 1980s. They are very concerned about the jobs market and they should be.
GHARIB: Actually it's interesting that you bring up the employment report, because there are going to be two employment reports between now and the Fed's next meeting in December. What's going to be the most important thing to watch, those jobs numbers or the whole school of other economic numbers, Michelle, Mike?
GIRARD: I think the job story is so important here because we all know consumers need income if they're going to be able to spend. And so that's really the one piece of this recovery puzzle that still has to fall into place. I definitely think we need to see decelerating job losses. That will come before we get the unemployment rate coming down. We need to see those job losses start to end and actually we think early in the year we'll actually start to see job gains. That is absolutely critical to getting people believing this recovery is for real.
GHARIB: Mike, you mentioned something about the market just a moment ago. It was pretty confusing of how investors felt about this Fed decision. Initially the Dow rallied and by the close, the rally fizzled out. So what's the message here?
HOLLAND: The market is very, very wary right now Susie. Any piece of information seems to be amplified in terms of how much it affects the market. There doesn't seem to be a lot of liquidity in either direction, which usually is a turning point in the market. I don't know if the next big move in the market is up or down. We've got a huge move in the world markets, including the U.S. market from the bottom in March so that people are very wary and the bond market is quite placid, which is interesting also. There's probably more risk in the bond market than the stock market. But the stock market right now is hanging on every word that the Federal Reserve was printing today. That's why they said nothing.
GHARIB: Mike, are you changing your strategy right now?
HOLLAND: No, no. Mine is glacial, Susie. They seem to have priced everything in the world that is - can be denominated in dollars at very high levels, Shanghai real estate and gold and a lot of other things. The U.S. stock market still looks to be one of the better values out there with a lot of things having gone up dramatically since March. The Taiwan stock market is up 60 percent for example. Hong Kong real estate can be up a lot more than that.
GHARIB: Let me just wrap it up. We have just a little bit of time left. Michelle, you said you don't see rate increases until June. Most people, the consensus view is maybe December or January. What's your thinking on that?
GIRARD: Oh, I don't think that the Fed is going to be looking to raise interest rates, as they said, until they're sure the economy is on solid footing. I do think there's concern that they overstay their welcome. I'm not as complacent. I'm not as comfortable believing inflation's going to be as low for as long as they think, but I don't think that they're going to raise interest rates until they are absolutely sure this economy and this recovery is sustained and on a self-sustaining basis it's growing.
GHARIB: All right, we'll leave it there, talk to you at the next meeting. Thank you both so much, Mike Holland, Michelle Girard.
