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Fed Raises Key Interest Rate a Half Point to 6.5 Percent

Aired May 16, 2000 - 2:15 p.m. ET


LOU WATERS, CNN ANCHOR: There was some debate over whether the interest rate hike that we're expecting this afternoon will be a half a point or a quarter a point. We now know it's a half a point, up to 6.5 percent.

Rhonda Schaffler is at the New York Stock Exchange with the market.

I guess we can expect it to react today.

RHONDA SCHAFFLER, CNN CORRESPONDENT: And we're already seeing that reaction, Lou. The market is still up. The Dow, at the moment, is up 85 points, but it is pulling back from its early advance. Before the announcement came out, the Dow was up 135 points.

And the reason the market is pulling back is that, in its commentary, the Federal Reserve indicated that more interest rates could be down the line, the Fed saying that it is concerned that demand is outpacing productivity.

This interest rate hike today was the largest by the Federal Reserve in five years. And while the Dow was holding on to that triple-digit gain for much of the session, it is now up about 84 points as traders try to digest the news. There was a bit of booing when the commentary came out from the Fed.

The question now is, of course, what is next? And the Fed does seem to indicate it might not be done with this tightening cycle. The central bank has had six interest rate hikes now since last June, and the Fed saying that it looks like there will be more to come because of that concern about demand outpacing productivity.

That is the early read on the commentary we're getting on that half percentage-point increase. The Dow is still holding on to a gain, though. It's up about 99 points. So while it's pulled back a little bit, the market has not, at this point, seen a knee-jerk selloff on that news -- Lou.

WATERS: OK, Rhonda, we'll get back to you.

John Metaxas is at the Nasdaq.

A little pullback there, too, John? JOHN METAXAS, CNN CORRESPONDENT: That's right. We hit our session highs a little bit after 2:00 today, up 121 points. And as you can see with the number right now, we're up some 92 points. So we've pulled back a little bit. We're at 3700. The volume remains a little bit on the light side by recent standards. We're still under a billion shares.

But if we can come over here and take a look at the action of the Nasdaq, we started with a positive action throughout the day and have been in positive territory. The stock market tries to look ahead and anticipate what's going to happen. The perception was that the Fed was going to raise the half point that they did, but the market rallied yesterday and rallied today ahead of that news. So perhaps it's to be expected that you'd have a little bit of a pullback when the Fed comes and does exactly what the market's been expecting and anticipating.

The focus now shifts to June 28 when the Fed meets again. And by the way, no commentators were really saying that this was going to be the last interest rate hike. The commentary was that the Fed may be coming near to the end of its interest rate hikes. We'll have to wait for data over the next several weeks, and then we also have the issue of a presidential election campaign, and the Fed will be considering how aggressively it wants to be tightening rates, if at all, in the midst of that campaign.

Back to you.

WATERS: OK, John Metaxas in New York at the Nasdaq.

Let's analyze this a bit with Jeffrey Rosensweig. He's an associate dean at Goizueta Business School at Emory University. He's also worked as a senior international economist at the Federal Reserve bank here in Atlanta.

Are you surprised that they've stood on the brakes this time?

JEFF ROSENSWEIG, GOIZUETA BUSINESS SCHOOL, EMORY UNIV.: They did exactly what they had to do. When they keep doing these quarter-point increases, the market goes up and people get happy. And what Greenspan's trying to do is stop the market from going up because people are feeling so wealthy, they're going out and buying a luxury SUV, putting a lot of gas into it. He's worried about inflation that people talk about. But he's also worried about the trade deficit, which is at record-size levels. That's a manifestation of us spending more than we're producing, which is the rhetoric they keep bringing up.

WATERS: What about the folks who are also worried that Greenspan is going too far?

ROSENSWEIG: There's a lot of people worried about that, but I don't think he is because, the problem is, if he didn't take a pretty solid shot like he did today, people act like, oh, that's great. They've got everything under control. Let's go out and buy stocks. And he really is trying to jaw-bone down these stocks a little bit. It's not that he's envious of people that are wealthy, but he knows they're spending a lot of money and it's beyond what our economy can sustain in the long run. We're talking about a $400-billion-a-year trade deficit. We never had $200 billion up to a year or two ago.

So we really are -- we are spending a lot.

WATERS: OK, hang tight, Jeff. We're going to check in with Ceci Rodgers at the Chicago Commodities Exchange, get the reaction there to the interest rate increase -- Ceci.


Well, it is pretty wild here, pretty frenetic trading going on in the wake of that announcement. Of course, it wasn't a surprise. The 50-basis-point rate hike was exactly as expected. But the comments that accompanied that rate hike are indicating that the Fed may move further in the months to come, and that is because the Fed remains very concerned about excess demand in the economy exceeding the available resources in the economy. A big factor in this is the unemployment rate, which is now below 4 percent at a 30-year low.

So bond prices, though they're higher for 30-year bonds and 10- year notes, if you go to the short-term interest rates, which reflect Federal Reserve policy, we're seeing a huge selloff there. And, in fact, I'm looking at the two-year treasury note. And this is important because this is the short-term interest rate peg for the federal funds rate. It is now at a new high -- five-year high of 6.88 percent. So it's a big selloff going on in the bond market.

But the long end, the 30-year treasury bond, the thing that's happening there is it's rallying because traders, in the long term, are very relieved that the Fed has been fighting inflation so hard. They believe that interest rates eventually will come down.

So kind of a good sign from the bond market in the wake of these rate hikes.

WATERS: All right, Ceci Rodgers in Chicago at the Commodities Exchange.

Jeffrey Rosensweig from Emory University is with us, an economist.

And how'd you like to concentrate on your job at the Chicago Commodities Exchange?

Take this down to the consumer level now. Someone said earlier that this will -- that consumers are going to start to feel this now. How are they going to start to feel it?

ROSENSWEIG: There's one important thing for the people that are listening, which is a lot of you have variable interest rate debt: You might have an adjustable-rate mortgage. More importantly, if you have credit card debt, pay this stuff off because that half-a-point increase is going to go straight into your variable rate; for instance, your credit card debt. And as we just heard, the markets are betting that over the next two years, rates are still going to be going up on the short end. But that's the stuff that the credit cards are tied to, the adjustable-rate mortgages. So don't let yourselves get hurt.

Notice that the stock market digested this. They expected it. If anything, the market's up over the last few days. Wealthy people are still wealthy, but those of you who built up a little bit too much debt, this is really stinging you. You're the one who's going to hurt when you got to go out and buy a new car or something or put some gas in.

So take this as a good opportunity to try to get rid of some of this short-term debt, the stuff that's tied to these short-term rates that are going to keep being pushed up. This is not the end of the game because Greenspan is not going to let this thing get out of control.

WATERS: Besides paying off these -- especially the credit cards, are there any opportunities here for consumers?

ROSENSWEIG: One thing that I'm interested in is, if you are wondering about some good stocks to invest in, some of the retailers are very beat up, they're very low because I think people feel like, well, if interest rates are going up, people aren't going to go shopping. People are still going to go to Home Depot. If anything, if interest rates go up and the mortgage rates, they're going up, if they don't buy a new house, they'll add on that new bedroom instead. So they'll go to Home Depot. So look at some of the good retailers as an opportunity to get into some stocks.

One thing I always push, as you know, Lou, is it's probably a good time for each of you to try to think about globally investing a little bit, maybe just through mutual funds. Throw in a few hundred dollars a month into some globally diversified mutual funds. This stock market we have now is a very volatile thing: could go up, could go down. But the one thing we've seen is continued volatility. It's a good time to set a longer-term strategy for yourself.

Again, I think Greenspan is trying to keep this thing sustainable. For you to be sustainable, get rid of the short-term debt and slowly put money into well-diversified mutual funds, and just do it every month.

WATERS: Now, I know it's a hard one to predict. You say it's going to be volatile, but along with this 50 basis points, which is a half a percentage-point interest rate increase, is the promise of more to come. How is the stock market going to digest that?

ROSENSWEIG: I think the stock market already built it in to a certain extent. Remember, Nasdaq's off quite a lot from the highs of a few months ago; so built in a little bit. On the other hand, people in the markets seem to be junkies for good news. Even this morning, as we heard a few minutes ago, it was up about 120 or so. They were maybe hoping he wasn't going to do 50 basis points. Of course he was. We knew he was going to. But there are junkies for this good news. And if they get some bad news over the summer, things could be a little bit rough.

I'm staying in stocks. In other words, I think people should stay with a long-term view. And you want to be in stocks, but you do want to start to spread it around globally or spread it through some well-diversified mutual funds. Don't chase last year's hot sector. You know, you might hear what things did last year. It's time to get yourself spread out a little more because there's some bumpy days ahead this summer.

WATERS: Jeff Rosensweig from Emory, see you down at Home Depot.

ROSENSWEIG: Excellent.



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