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Breaking News

Federal Reserve Raises Interest Rates by Quarter Point, Indicates Possible Inflation

Aired February 2, 2000 - 2:12 p.m. ET


LOU WATERS, CNN ANCHOR: Well, here we are, decision time. A bump up in interest rates is widely expected at any moment to keep the record expansion in the U.S. economy from overheating.

While we wait for that Fed decision, we're joined from Washington by Jim Chessen. He's the chief economist for the American Bankers Association.

Mr. Chessen, it's like deja vu all over again. We have an LEI up four-tenths of a percent, strong stock market, strong bond market, consumer confidence sky high and apparently the interest rates are going up again. What do you expect to happen here?

JIM CHESSEN, CHIEF ECONOMIST, AMERICAN BANKERS ASSN.: Well, we expect to have 25 basis points, quarter-of-a-percentage-point increase. The economy has been so strong and moving so quickly that I think there's a sense you just have to tap the breaks a little, slow it down. It's just too fast for the Fed. Something's got to give.

WATERS: Anything to be alarmed about here?

CHESSEN: With the Fed announcement being a little late?


CHESSEN: I don't think so. They've had a day and a half worth of meetings here. They've really tried to look at all the numbers, because they're trying to do a big projection. There's no question that they're trying to feel their way through. We've had technology, information that has really boosted productivity for a long period of time, but you can't continue to expect productivity to outweigh the wage pressures that we have seen anecdotally, at least, through the last year. So, I think there's a feeling you've got to take out a little insurance, you've got to bump rates a little to ease the economy back down.

WATERS: And I understand there's some anticipation that the employment report, the next one, will show even more jobs -- it will drop, is what I mean to say, and some economists are saying as a result of that and other pressures that this interest rate hike today might be the first of four before June.

CHESSEN: Well, I think that's the issue. I don't think there's any question in anybody's mind that the Fed is going to raise rates. I think the really question is when are they going to stop. We certainly expect that there would be at least 50 basis points, or a half-percentage-point increase over the next six months. It wouldn't be surprising to see it at 75 basis points, even a full percentage point. Things are moving so quickly that I think they need to take action, and unfortunately what that means is it raises the cost of credit for both business and individuals.

WATERS: Now, is that a bad thing?

CHESSEN: Well, it's not necessarily a bad things. I think the banking industry has been very competitive meeting the needs of businesses and consumers. There's a lot of demand for credit. I think there will be after this. The Fed, though, is raising the price of credit, and that means it's going to be a little more expensive for businesses, a little more expensive to use your credit card or use your home equity line.

WATERS: OK, we've just gotten the word. You're correct, 25 basis points, quarter-percent increase in Fed interest rates. Now, this is -- will this have some sort of a ripple affect in the prime rates and other rates like immediately?

CHESSEN: Yes, it certainly will. What typically happens is, when the Fed raises the price of money, banks have to raise it as well for the prime rate, and we'll see those decisions probably as early as this afternoon. The good news is the banks also have to be very competitive on the deposit side, and they have to raise interest rates on deposits as well, so we're going to see some benefits here and some costs, of course, with higher credit.

WATERS: All Right, Jim Chessen in Washington.

Rhonda Schaffler's at the New York Stock Exchange, where you said earlier, Rhonda, there's been some caution earlier in the day. Is that still the case?

RHONDA SHAFFLER, CNN CORRESPONDENT: Well, you know, traders are just getting the news, so the market is going to take a couple of seconds to react. There was a lot of hand-wringing ahead of the announcement, but as you pointed out, this is exactly what Wall Street was expecting: a quarter point rate hike. The Fed also raised the discount rate by a quarter point, and that is seen as taping the breaks gently on the economy to try to slow things down. The Federal Reserve did say there's some concern about inflation ahead -- that was released in the statement that just came out moments ago.

And there had been some fear that the Federal Reserve would be more aggressive with the rate hike and make a half-point move, so there's a little bit of relief that that did not occur. Still, though, most on Wall Street believe this will be the first in a series of rate hikes, this year, to try to cool the economy down.

And we're going to go back now to Lou.

WATERS: All right, Rhonda. And let's shoot on over to the Nasdaq, now, where Charles Molineaux is watching over things.

What's happening there, Charles?

CHARLES MOLINEAUX, CNN CORRESPONDENT: Well, Lou, technology investors really have been sitting right about at their best levels of the day here on the Nasdaq. We're up by 43 points at 4095. We worked our way up to this point right up until we heard from the Federal Reserve. A lot of strategists figured that at 2:15 the Federal Reserve was going to make its announcement, and at 2:16 everyone was going to try to figure out what the Federal Reserve was going to do next.

The whole world pretty much has been prepared for a 25-basis- point rate hike. Larry Wactel (ph) over at Prudential says we've been dwelling on this ad nauseam for the past three weeks, and at this point, as he puts it, small children in Guatemala expected the Fed to raise 25 points. So, this is not a big surprise.

The question becomes what happens next. And the language that the Fed uses in deciding to raise rates is also crucial, because we no longer have a broad, gross statement like a statement of bias towards tightening or towards loosening, but rather an elaboration on the Fed's concerns about the inflation picture going forward. And once again, the Fed is saying that it is concerned about inflation going forward, but that is roughly what the market expected: mild statements of caution.

Right now, however, we see that the Nasdaq has broken out on the up side. We are now up by 32 points, which -- at 4081. That means that evidentially the market is looking very positively on this. Brian Finnerty (ph) over out of C. Eneberg Tobin (ph) was expecting this to be a non-event, figuring that it's in the market unless the Fed threw us a curve ball, which it did not, and the expectation for a quarter basis point has now been fulfilled, as has some mild cautionary language. The expectation for a lot of strategists has been for either a mild sell-off or a rally on this news. A rally is now apparently what we are seeing for these technology stocks, and then probably a sell-off from that point bringing us to more-or-less a wash on the day.

But at the moment, the market is looking very positively on this. The Nasdaq is now at 4081, a gain of 29 points. We have slipped back somewhat, but still a positive response to this news.

WATERS: All right, Charles Molineaux at Nasdaq. More from you later on.

We also have the Fed saying that it's worried about excess demand growth that could foster inflationary imbalances.

And Jim Chessen, we understand these policy statements about biases has been eliminated in these interest rate reports in favor of a message such as the one I just read about the Fed worried about excess demand growth. What does that mean? CHESSEN: Well, I think what it means in this case is that businesses are still demanding a lot of credit. They think that there's a lot of potential out there to expand their businesses. They still see huge consumer demand. I think the fourth quarter, particular in the Christmas season, was an example of how consumers are still spending. So, they expect that businesses are going to be investing, and to do that they need to borrow, and they're trying to slow that down a little by raising rates today.

WATERS: All right, Jim Chessen, chief economist for the American Banker's Association, thank you.


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