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Federal Reserve Board Cuts Rates Half a Point

Aired April 18, 2001 - 11:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
DARYN KAGAN, CNN ANCHOR: And we have breaking news as we start the hour.

LEON HARRIS, CNN ANCHOR: That's why it's CNN LIVE THIS MORNING.

KAGAN: Yes.

HARRIS: We've got lots happening this morning.

First of all, we'll show you what's happening right now. We're going to show you the result of the news that we've just heard. You're looking now at a picture of the big board at the New York Stock Exchange. You see the Dow Industrials are up 324 points.

That is a huge jump, and it could be -- I'm guessing. It must be related to this news that we've just gotten in here just moments ago about the Federal Reserve unexpectedly now cutting a key interest rate and by a substantial amount. One-half percentage point cut this morning, being put into effect by the Federal Open Market Committee.

Let's go to our Myron Kandel who's standing by in New York at the CNN Financial News Desk. He's got the latest on all this, which is looking like it's turning out to be some very good news this morning -- Mike.

MYRON KANDEL, CNN FINANCIAL EDITOR: Well, it really is a big surprise. I must say it took Wall Street by surprise. It -- the feeling was that the pressure was being eased on the Fed to cut rates in between meetings.

The next meeting is scheduled -- of the policymakers -- scheduled for May 15th, and a lot of people on Wall Street earlier had been calling for an intrameeting cut, but that pressure sort of eased when we got some figures on the economy that showed it wasn't in as bad shape as some people thought.

However, the Fed took this dramatic act -- and it is a dramatic act because it's very rare for the Fed to cut interest rates in between meetings. It did once before earlier this year -- January 3rd, as a matter of fact, when it cut by half a point -- and then it cut twice more but at regularly scheduled meetings.

So this is the fourth cut within a little more than three-and-a- half months, fourth cut by half a percentage point, which, in itself, is a dramatic move because the Fed usually moves in quarter-of-a-point increments.

Well, this is an indication that the Fed is concerned about the economy. All these layoffs that we've been hearing, bad earnings reports, warnings of worse earnings reports have obviously triggered a reaction by the Federal Reserve, and that resulted in today's cut in interest rates, taking Wall Street by surprise, but a very pleasant surprise.

If you look at the Dow right now it's up 353 points. The NASDAQ is up 154 points. Wall Street was surprised, but it likes what it heard.

HARRIS: Yeah, no doubt. Wall Street was hoping to hear something like this a few weeks ago, and -- and that's what's kind of interesting about this, Mike, because it seems as though the Dow -- I'm sorry -- the Fed Open Market Committee says -- they've openly said that they don't do things with just the stock market in mind, and we've been hearing talk in recent days that perhaps the market as sort of reached a bottom or -- or may be approaching the bottom, and the economy and the markets will be recovering sometime fairly soon.

So is there any one particular sector or reason why the Fed would make this move at this particular time, in spite of that news?

KANDEL: Not really, Leon. That's why it was such a big surprise. Because the figures we got yesterday -- industrial production moved up for the first time in a number of months, and that indicated a slightly better tone to the economy, and there have been other rather positive reports or not-as-bad-as-expected reports -- put it that way.

On the other side, what, obviously, the Fed was focusing on is the fact inflation is well under control and that companies are still under pressure, and everyday we get new word about job cutbacks in the thousands, not just hundreds but the thousands, and warnings about slower growth ahead for companies. I mean, what is the economy made up of, of companies, and, therefore, all this together, obviously, has decided the Fed that the economy is slowing, indeed, needs another shot in the arm, and that resulted in today's drop -- Leon.

HARRIS: Talk about a shot in the arm. We just showed the Big Board just a second ago. Can we show that a -- once more because it was up over 400 points. That's a number we haven't seen in a long time here, Mike.

KANDEL: Well, absolutely. Yeah. One of the biggest increases in the Dow's history. That figure...

HARRIS: And look at the Nasdaq.

KANDEL: The Nasdaq is up 167 points, above the 2,000 mark. You know, just a week and -- or -- a half ago, the Nasdaq was down around 1,600, and the Dow -- three weeks ago, the Dow during the day, what we call an intraday low, was at 9,106. So look at that change. That's a gain of 1,500 points in less than four weeks, an amazing rise for the Dow as well as for the Nasdaq -- Leon. HARRIS: All right. Next question is -- this is going to be a one-morning wander or see how long this is going to last.

Myron Kandel, thanks for checking in and making some sense of this for us. We appreciate it.

Let's continue now with coverage on this breaking story with Daryn Kagan.

KAGAN: More now on this move by the Fed. Let's go to Washington, D.C., where our Jeanne Meserve is standing by -- Jeanne.

JEANNE MESERVE, CNN CORRESPONDENT: Daryn, not standing by alone. With me here is Allan Dodds Frank, a correspondent for CNN Financial News.

Thanks a lot for coming in. You think that the Fed was looking at some data that came in just this morning.

ALLAN DODDS FRANK, CNN CORRESPONDENT: Jeanne, the Fed was look at a lot of factors, one of which was the narrowing trade gap that dropped unexpectedly by more than 18 percent this morning, which meant that U.S. consumers are buying far less in February than had been expected.

You know, the Fed says that they're worried about the rising uncertainty about the business outlook and its softening of capital spending, and that's why they chose to reduce the federal funds rate by 50-basis points and the discount rate by 50-basis points to 4 percent -- 4-1/2 percent and 4 percent.

And so the issue here is what to do about the economy as it continues to break. They want to slow that descent. Obviously, the market likes it. It's rallying immediately on this news.

MESERVE: This 18-percent drop in the trade deficit -- what does that indicate? What's responsible for that?

FRANK: What's responsible for that is people not buying as much stuff, particularly consumer electronics, and that sort of thing.

MESERVE: So does it reflect consumer confidence then? Is this just another indicator that...

FRANK: It does, indeed. In fact, "Fortune" magazine has on its cover this week "Oops! There goes the consumer confidence levels. Does this mean a recession?" Clearly, that's the kind of thinking that has the Fed worried.

MESERVE: We've talked about the impact on the stock market, but, for Joe Consumer, what do these drops in these particular rates mean?

FRANK: Well, this should produce interest rates across the board eventually, and it gave the market confidence that the Fed is worried about the economy and may even entertain another interest drop -- interest-rate drop in May. MESERVE: That's what I was going to ask you. What's the outlook for future drops in the rates?

FRANK: Well, I think, if the Fed is worried that the economy continues to slow, that capital investment is continuing to drop, they will continue to worry about whether interest rates are still too high.

MESERVE: You mentioned May as a possibility. Is that when the Federal Reserve Board...

FRANK: That's a regular meeting.

MESERVE: ... meets again?

FRANK: Correct.

MESERVE: What's the likelihood that you could see another drop before that meeting?

FRANK: Well, it's possible, but it's just -- this one is a sur -- kind of a surprise, and I just can't predict what they will do between now and May.

MESERVE: Well, shucks. We wish you could. Allan Dodds Frank, thanks a lot. Daryn, back up to you in Atlanta.

KAGAN: Jeanne, thank you with news there that left Allan breathless. He was so excited about that. Thank you for that coverage.

Once again, if you're just joining us, the Fed, in a big surprise move, has decided to cut interest rates by one-half of a percentage point, 50-basis points, and Wall Street is having a lovefest over this news. The Dow up 413 points. Nasdaq is up 180 points. We will keep our eyes on those numbers four as we continue our coverage -- Leon.

HARRIS: That's incredible. Just knocking on some wood here.

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