1/31/06: Reaction To The Interest Rate Increase
SUSIE GHARIB: More now on that interest rate hike by the Federal Reserve today. Joining us now for more analysis, Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of the money management firm Holland and Company. Hi, Mike, hi, Michelle. Nice to have you on the program.
MICHELLE GIRARD, RBS GREENWICH CAPITAL MGMT: Hi Susie.
MIKE HOLLAND, CHAIRMAN, HOLLAND & CO: Hi. Susie.
GHARIB: Michelle, I`d like to begin with you and first get your reaction about the Fed decision. Did the Fed do the right thing today? And also, what`s your take on that policy statement?
GIRARD: Well, I do think that they did the right thing. I think the economy continues to face some upside risks with inflation, but away from that, I think the statement was what we all focused on, and, you know, they did what we thought in terms of taking out some of the forward-looking language, as we`ve been referring to it, to give the new Fed chairman complete flexibility when he comes in to assess the economy, to assess monetary policy conditions and to move however he sees best fit.
GHARIB: Mike, what was the message from the markets today?
HOLLAND: Excellent question, Susie, because the markets basically said, as Michelle was just implying, that Alan Greenspan had given a very good heads-up to the markets as to what to expect. They fulfilled it, including the wording and I think the markets are fully expecting -- I think it`s a 70 percent probability for one more interest rate hike. And if all of that comes to pass, it will be a very smooth transition.
GHARIB: Michelle, you heard our report about Ben Bernanke taking over on March 28. That will be his first in terms of presiding over his first official Fed meeting. Do you think that it`s going to be at that meeting that he will stop raising rates or do you think he has to prove himself as an inflation fighter?
GIRARD: I don`t think he feels the need to prove himself as an inflation fighter. I think the Fed`s decision in March is going to be dependent on how the economy looks, and if the economy continues to show good momentum, I think the Federal Reserve under the new Fed chairman will take action. Our expectation is after a somewhat soft growth pace in the fourth quarter, the hurricanes were really a factor, we`re going to see very strong growth in the first quarter and so I think that the Fed is going to end up raising rates -- that the new Fed chairman will raise rates, not again to prove himself but because that`s what the economy is going to dictate.
GHARIB: Mike, the new Fed Chairman Ben Bernanke isn`t really well known on Wall Street, doesn`t have many connections with the Wall Street community, and now the economy is in pretty good shape as he takes over. What do you think that Wall Street is expecting from him? What would they like to see?
HOLLAND: Well, Susie, I think Wall Street`s done a cram course on Bernanke as well as what he`s written, as well as what he`s done for the past 15, 20 years. And I think at this point, the markets are very comfortable with him. He`s been astute academically, as well as politically. He`s done some things at Princeton and in Washington that give people some very good solace that he is going to be able to do exactly what Alan Greenspan did in terms of making the public feel good about what`s going on. But also I think he`s got an open mind about not just inflation, but he`s been an expert on something called deflation, which the Chinese are now beginning to talk about. So I think if he`s around for as long as Alan Greenspan, he may see a lot of different things and we need someone who has an open mind.
GHARIB: Mike what, do you think that the changes at the Fed with Bernanke in charge as chairman will mean for individual investors?
HOLLAND: I think it`s a good thing because I think he won`t -- the thing we have to worry about and our history is the Federal Reserve can do some very significant damage to the economy and to the markets when it has made mistakes and they`ve made some huge mistakes over the past 50 years. Under Greenspan, we didn`t have any huge mistakes. We had some mistakes that some people carped (ph) about in 1999, 2000, maybe over tightening. But overall, I don`t believe Bernanke -- at least his history would indicate -- would make a big mistake. That would be out of character.
GHARIB: Let me get forecasts from both of you for 2006. Michelle, you first, where do you think the Fed fund rates will be by the end of 2006?
GIRARD: I think Mike may have a heart attack, but I think that the Fed is going to keep raising rates and I think we`re going to go up a full percentage point from here and it really is based on the fact the economy looks so strong and the inflation rate now is right at the upper end of the Fed`s comfort zone. There`s not a lot of wiggle room, so I think they`ll have to take policy a little bit further than people think right now. It won`t throw the economy into recession, but it will keep inflation in check.
GHARIB: And, Mike, your forecasts for the market, for the Dow and the NASDAQ for 2006.
HOLLAND: Let me put down my defibrillator here. My chest has stopped hurting. I hope it doesn`t go above 4 3/4 and if it does what Michelle does, all bets are off for me. But I think that the path of least resistance for the stock market continues to be up. We`ve had a laggard stock market in the U.S. versus the rest of the world, Susie, as you`ve been reporting over the months and I think the U.S. stock market, particularly some of the big multinationals, probably are going to play some serious catch-up. So I think that the bond market, probably the longer bonds probably trade up in yield a little bit. The stock market goes up I think significantly.
GHARIB: OK, I`m going to have to cut you off there, but thanks a lot Mike and Michelle both of you, for coming on the program.
GIRARD: Thanks Susie.
HOLLAND: Thank you Susie.
GHARIB: We`ve been speaking with Michelle Girard, senior economist RBS Greenwich Capital Management and Mike Holland of Holland & Company.
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