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Fed Lowers Interest Rates by Quarter Point

Aired June 27, 2001 - 14:12   ET


NATALIE ALLEN, CNN ANCHOR: We've just gotten the word from Alan Greenspan and company, reducing interest rates a quarter point.

Let's go to CNN senior financial correspondent Rhonda Schaffler, who's at the New York Stock Exchange.

Rhonda, as you said earlier, many were wondering -- Wall Street was mixed whether it would be a quarter point or a half point.

RHONDA SCHAFFLER, CNN CORRESPONDENT: That's right. It's interesting because the market hasn't initially responded, as people look at the headlines coming out with the fact that rates have been cut just 25 basis points. The Fed is saying that inflation is contained, but there is slowdown risk ahead.

The Fed seems to signal a potential for possible additional rate cuts.

The Fed is citing lower profits and a reduction in capital spending as reasons for its move.

The Dow industrials now are starting to sell-off. The reason for this is that there was some hope the Fed would continue the pattern it has all year, with aggressive rate cut, cutting by 50 basis points. So there was some hope that the Fed would continue to be aggressive with this move.

Also, we'll get the full text of the Federal Reserve's statement, and that is always just as important as the action the Fed takes. It looks very similar to what we saw in May from the Fed.

As of right now, the market is fairly steady, though, down 20 about 20 points. It had been up 20 and change before we get this announcement.

What we're seeing now is the sixth rate cut by the Federal Reserve this year, and its a complete reversal of what was going on just a year ago, when the Fed had to raise rates.

These rates, of course, impact everything from credit card balances to consumer loans.

As far as the Nasdaq, the Nasdaq has turned around as well, down about 4. The Dow is still selling off, but it's fairly contained here.

I was referring to the statement that the Fed released in May, the last time it made a move. It said, at that time, erosion in profitability combined with uncertainty in a business outlook will hold down capital spending.

What's key from Wall Street's perspective is this current quarter that we're in now, this second quarter. We have seen companies saying that their profits will miss expectations. Profits are expected to be done dramatically. Some on Wall Street are hoping that a move by the Federal Reserve will signal that an improvement is on the way, on the horizon, as far as capital spending goes.

Another reason why we saw this 25 basis point move here is because, you recall just yesterday, we were talking about economic numbers coming in stronger than expected: consumer confidence remaining high, for instance -- the pace of home sales remaining high and an increase in orders for durable goods.

So the economic news, to this point, has been very mixed, the Fed taking a 25 basis point move, but saying that there is still some risk ahead. Inflation is contained. As far as how these markets are reacting, it's fairly muted, at this point. They did turn around, to trade lower. The Dow's off 26, the Nasdaq's down, and the S&P 500's also lower. It tends to be a very volatile hour or so of trading after an FOMC announcement, so we'll watch that closely.

Back to Atlanta.

ALLEN: Rhonda, we'll be in close contact with you, as you keep watching those numbers. They could change.

LOU WATERS, CNN ANCHOR: Joining us from Miami is Jennifer Openshaw. She is the founder of the Women's Financial Network and author of the book "What's Your Net Worth?"

JENNIFER OPENSHAW, WOMEN'S FINANCIAL NETWORK: There was talk that this decision today by the Fed would be either a promise of a recovering economy or a decision based upon more concern over the economy ahead, the weaker economy, and it seems to be the latter. Does that surprise you?

It does a little bit because we are hearing that were having more layoffs, announcements of earnings are coming next month, and we're still seeing that those are not going to be looking so good. But the reason, as we heard a little bit earlier, that he did not drop as much is that some of the numbers in the last couple of days do suggest that consumers are feeling more confident: home sales going up and, also, we're going to be getting tax rebates, a little bit later in the year, and I think he wants maybe to see if that's going to help the market as well.

ALLEN: This is the sixth cut this year, Jennifer. What's happened prior, as far as these cuts have gone? Who knows whether this sixth time will be the charm? OPENSHAW: We don't know if it's going to be the charm, Natalie. I think it's very likely that we will see another rate cut later on in the year. Of course, it's going to depend on how companies are doing with their earnings and their capital spending.

We've seen five rate cuts over the past year, of about half a percent, and the good news is that for consumers it means that costs of borrowing are coming down. If they're borrowing for a home, if they're borrowing for a car, those are the things that they're going to be saving money on. Consumers in particular who are concerned about bringing down those debt costs, as well, can take advantage even of the rate cut today, as well.

WATERS: Stay close, Jennifer.

We're going to check in with Lisa Leiter now, at the Chicago Board of Trade, to get reaction from there to this interest rate cut of a quarter basis point.

LISA LEITER, CNN CORRESPONDENT: Thanks, Lou. The market is reacting very similarly to what traders expected when the Federal Reserve announced its quarter point rate cut. Traders here expected the 30-year bond to rally on that type of news, and the 30-year bond traders have been worried that perhaps the Fed was being too aggressive in recent months and that that could eventually spark inflation, if the economy rebounds too strongly. So we're seeing the 30-year bond rally three-quarters of a point right now, the long-term interest rate there coming down to 5.60 percent.

The rest of the Treasury market, though, is selling off on this news, perhaps disappointed that the Federal Reserve did not cut interest rates by a half a point, as about half of the market participants expected. We're seeing the 10-year note interest rate come down to 5.23 percent, and the short end of the Treasury market, that two-year note, which is the most sensitive to Federal Reserve moves, is selling off as well, and that interest rate is all the way up to 4.09 percent.

All in all a mixed reaction here at the Chicago Board of Trade.

WATERS: Which is a noisy place to work for Lisa Leiter.

Let's jump on over to Nasdaq, where Greg Clarkin is.

We saw the market turn on a dime; now it's turning again. Greg, yesterday, investors knew that this interest rate cut was coming; they didn't know how big it would be. What's the reason for this apparent volatility all of a sudden?

GREG CLARKIN, CNN CORRESPONDENT: Lou, folks were really kind of split down the middle on what they were expecting here, 25 basis point or 50. They got a quarter point, so half the camps out there were probably right in line with their expectations.

What we're see really is the Nasdaq, at least for its part, holding up very nicely. It was up maybe eight points when this decision came out. It sold off a little but, was down about five points, and now it has come back. So tech stocks, at least, are doing their part in holding ground at this point.

The volatility -- you get a lot of folks that are just going to trade on this decision no matter what it is, so that accounts for a big spike in volume that we saw in the Nasdaq over the last 10 minutes or so.

But all in all, the Nasdaq is holding up nicely.

Some of the big names are virtually unchanged to where they were about 10 minutes ago: Microsoft, Intel, Dell and the like are maybe a few pennies higher or lower than where they were. We're not seeing anybody, at this moment at least, making any big moves off this announcement.

Again, it's an announcement that has probably pleased about half the people out there and displeased some of the others. But at the moment, in the markets, it's a wash, and the Nasdaq is right around breakeven -- Lou.

WATERS: Greg Clarkin, at Nasdaq.

So we have consumer confidence up. That was one of the latest numbers we got where it showed improvement in the economy. Also durable goods orders and new home sales, but investor confidence still is not up.

ALLEN: Company profits are still not up, as well.

Let's go back to Jennifer Openshaw, who joins us from Miami.

What will you be looking for, Jennifer, to see that this economy is starting to turn around as we approach the last half of the year?

OPENSHAW: Natalie, second quarter announcements will be coming out for earnings, and we're still expecting them to be down. We're also seeing layoffs. Those have continued. We want to see companies pull back on those as well. I think investors are still sort of on the sidelines: We're not quite sure if this is the end of it, or if it's going to continue.

I think it will be later in the year when we start to see some more positive news out of companies, and of course, we want them to be spending more, because as they are spending and growing their companies, they're keeping people employed. Remember that, to date, it's been consumers who have been the savors in keeping the market going, as they've been continuing their spending.

WATERS: There's some disagreement, Jennifer, over whether there will be another interest rate cut this year. But no matter what the Fed does, there are some stock traders who are saying it doesn't make any difference what the Fed does on interest rates. Would you agree or disagree with that?

OPENSHAW: I think it certainly does, from an investor's or individual's standpoint, as they're looking to struggle with the debt. In fact, most people today have an average of $7,500 in credit card debt. How can they bring that down? Yet we just heard recently that people are not saving; in fact, the average savings level is lower than what it was since the Great Depression. We are spending more.

So today, some of the things people can do are to refinance their debt, to think about maybe taking out a home equity loan or a line of credit to bring down those costs.

And also keep in mind that come July 1, student loans are going to be coming down 2.2 percent. That's as a result of the previous interest rate cuts. Think about consolidating those loans. I like to remind people, by the way, if you are married and you're consolidating loans, that you do want to keep it in one person's name, because having it in both persons' names, if something happens to the other person, those loans will not be forgiven and it will become the responsibility of the other person.

ALLEN: Jennifer, as far as spending goes, credit card rates -- we usually said this means credit card rates will come down, but that didn't necessarily happen last time.

OPENSHAW: It didn't, Natalie. Credit card companies tend to have floors, meaning they're not going to take interest rates below a certain point, because they want to make a profit. So that floor tends to be about 11 percent to 14 percent or so for their best customers. We saw them bring down credit card interest rates earlier in the year, and this cut doesn't make any difference there. That's not really going to help consumers so much.

ALLEN: I guess we don't need to use our credit cards anyway.

OPENSHAW: We don't. We need to be saving. Today is really a time to remember that, because we are having more layoffs. People's hours on the job are cutting back. People should think about saving and perhaps even using something like a Microsoft Money to help you develop a budget to save over the long term, to meet those retirement goals.

ALLEN: Always good advice. We thank you, Jennifer Openshaw, Women's Financial Network. Thanks for joining us.

WATERS: Again, the Fed has made its interest rate decision: down a quarter basis point, 25 percent -- boy.



4:30pm ET, 4/16

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