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Fed Cuts Interest Rates

Aired January 31, 2001 - 2:17 p.m. ET


JOIE CHEN, CNN ANCHOR: Well, there are plenty of signs of slowing, but try telling that to new homeowners. The Commerce Department today reported sales of new homes were up 13.4 percent just last month. That's the biggest monthly gain in more than seven years. Why buy now?

CNN's Susan Candiotti is at one housing development in Weston, Florida.

Susan, why?

SUSAN CANDIOTTI, CNN CORRESPONDENT: Hello, Joie. One reason would be if interest rates go down another half percentage point. We expect an announcement about whether that would happen in just a few minutes from now.

Let's talk to someone who has been in the real estate business for 13 years. She's a broker, Marcela Gillman.

Marcela, if rates go down, I guess it doesn't take a lot of brain power to figure out that sales might be expected to go up. What do you think?

MARCELA GILLMAN, REAL ESTATE BROKER: People will have the opportunity to buy a more expensive home and keep a lower mortgage payment. So I think it is the time for everybody to take advantage and by a home if they can.

CANDIOTTI: What are your customers telling you about their level of consumer confidence? I'm sure you've heard that it has been dipping to its lowest rate in four years because of a decline in the economy. Are people worried when they're going out right now to look at homes?

GILLMAN: They're not reflecting absolutely anything at all. They're just trying to see if they can get a better home, and they're just waiting. A lot of people are waiting for low interest rates. They think they should take advantage of it. But now, down here in South Florida, nobody is complaining about the economy.

CANDIOTTI: Ms. Gillman, thank you for joining us.

Now let's move over to someone who, in fact, at this time is in the market for a new home, and that is the Diaz family of Davie, Florida. You've been searching seriously, Mr. Diaz, you told me, for about four months now you've been in the market. But with the expected decline in interest rates, which could affect the mortgage rate, do you buy now or do you sit it out a little while longer?

UNIDENTIFIED MALE: Well, actually, I think we are almost ready to buy. But definitely, the interest rate will make an impact of our decision to buy a home, yes.

CANDIOTTI: So the question is, do you do it now? You told me a little while ago, you might buy as early as this week. But if the rates go down, are you going to wait to see?

UNIDENTIFIED MALE: Probably. That's a good question. We might probably wait a little bit and see if the interest rate goes another quarter or a half point down. Yes.

CANDIOTTI: Now, Ms. Gillman mentioned you might expect to get more house for your money. What are you expecting as you go out and look around? Are you getting as much as you would expect to for the amount you are prepared to pay?

UNIDENTIFIED MALE: That's what I am expecting. To get some more, yes.

CANDIOTTI: How big of a house would you like to buy?

UNIDENTIFIED MALE: Well, right now we have three kids, and ourselves -- five. So we expect to have a home which may include five or six bedrooms to be enough to have enough space for everybody.

CANDIOTTI: In fact, we're getting word now that, in fact, there has been an announcement that mortgage rates -- the interest rate is going down to 5.5 percent, which could impact, of course, mortgage rates even more. So, with that in mind; news hot off the presses; do you buy now or do you wait?

UNIDENTIFIED MALE: It's actually a good question. You asked me before. It's a matter of trying to take a chance. But definitely we're looking for to buy a house.

CANDIOTTI: All right, Mr. Diaz, thank you very much. Not prepared to commit at this time. We will wait to see what happens and, of course, that might not be good news to their broker, but nevertheless, they do appear to buy a new house pretty darn soon. So, we shall all wait to see what happens in the coming weeks.

Joie, back to you.

NATALIE ALLEN, CNN ANCHOR: Susan Candiotti, we thank you. Our guest today, Jeff Rosensweig, international business and finance professor with Emory University, author of "Winning the Global Game."

We just heard the Fed has made their announcement, cutting the short-term rate to half a point, to 5.5 percent. No big surprise there. So what's behind it, Jeff? JEFF ROSENSWEIG, INTERNATIONAL BUSINESS AND FINANCE PROFESSOR, EMORY UNIVERSITY: It's no surprise, because we've been predicting it's going to happen (UNINTELLIGIBLE) since September with you. But sadly, though, some folks on the market were getting ahead of themselves. They were hoping for one point. I didn't see it. I saw 50 basis points. We got what we expected. And yet, the market is already falling as we sit here, because people were getting a little bit jumpy, hoping for 1 percent.

It shows what a tough spot Greenspan was in right then, because if he didn't cut, we would have had blood in the streets, quite frankly, if he didn't give us the 50 basis points.

We're getting these layoffs everywhere we look, and yet he cuts and he probably goes like "What can I do?" The markets are already turning negative as we sit here.

ALLEN: Let's talk with Rhonda Schaffler about that. We'll get back to you in just a moment. Let's go to the New York Stock Exchange. Rhonda, what's happening?

RHONDA SCHAFFLER, CNN CORRESPONDENT: Hi, Natalie. First of all, let's talk about the fact that this was largely expected: the half percentage point move. And in fact, some traders, after that announcement was made, they said, tell us something we don't know. And what they were doing there was responding to headlines on the tape that said the rate cut came because of erosion in consumer and business confidence. That clearly was apparent yesterday, the consumer confidence number. And also, a headline that the downturn called for rapid forceful action.

Let's bring you up to speed on the numbers. At this point, the Dow industrials, after dipping a little bit, are pretty much back to where they were before the announcement, climbing a little bit right now; gaining 38 points. The Nasdaq composite, little movement there, up about 9 points. So, not too much of a market reaction right away.

Back to some of the statements from the Federal Reserve: The Fed said that it stands ready to do more if necessary. That, of course, will be key for the markets going forward. The Fed saying productivity and the lower rates should aid growth. One reason why we might not be seeing immediate reaction here in the market is that there had been so much widespread speculation that a half percentage point move would be made. As it was, that traders here are not surprised by this move at all. The last time the Fed made a half percentage point move: it was in between meetings -- a complete shocker. On that day, the Dow nearly rallied 300 points before selling off just a little bit.

The one thing we can tell you is, in this month, with these two very strong rate cuts, and now signs of more to come. The Federal Reserve is being aggressive in its move to try to reinvigorate the economy and shifting pretty dramatically from where it was, not too, too long ago when the main concern was fighting inflation. Before we had the news from the Fed, we should tell you financial stocks were moving higher. That is a group that will be closely watched for the next couple of hours here. And we also saw that interest rates had been moving lower, leading up to the announcement.

Just to recap here: the Dow is gaining some momentum, up 67 points right now. And the Nasdaq is up 28. That's the latest from the floor. Back now to Atlanta.

ALLEN: All right, Rhonda Schaffler, we thank you.



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