Analysts Say America Will Barely Avoid a Recession
DEBORAH MARCHINI, CNN ANCHOR: It was a week in which we had a very large surprise: The Federal Reserve cut interest rates, unexpectedly, by just about all concerns, and the result was a powerful rally in the equities markets. Here to talk a little bit about what the Fed was aiming for and what it's likely to receive is David Horner, senior financial strategist at Merrill Lynch. And on the phone from Denver, Colorado: David Jones, chief economist at Aubrey G. Lanston. And I'd like to start with you, David Jones. The Fed cut interest rates. Is policy still too tight, or have we've seen what we're going to see?</s>DAVID JONES, CHIEF ECONOMIST, AUBREY G. LANSTON & CO.: Well, Deborah, it's clear that when the Fed began this series of easing steps they were behind the curve. They waited too long to start easing, actually, being so surprised that the economy was slowing so dramatically at the end of last year and early this year. But I do think they're about even with the curve with this surprise 50-basis point cut. Remember now, we're down two full percentage points and the Fed's target to 4.5 percent from 6.5 percent in the overnight funds rate when these easing moves began. And I certainly think we have more to come.</s>MARCHINI: David Horner, do you agree?</s>DAVID HORNER, SENIOR FINANCIAL STRATEGIST, MERRILL LYNCH: I do agree. I think there's more to come, although I believe the Fed may start with 25 increments now at the May 15 meeting and then perhaps the June meeting, because we have a sizable tax cut coming in the second half of the year. And while, certainly, that's not cast in stone yet, I'm pretty sure it'll be sizable. A lot of it will be front-loaded, and the Fed will be wary of cutting too much from here on. But they definitely did the right thing in cutting intermeeting. And yes, there's probably another 50-basis points to come over the rest of the quarter.</s>MARCHINI: I mean, do you think the Fed's been too tight?</s>HORNER: No, I don't. I mean, I think last year they had to do what they did to slow an economy which was threatening to get out of control, but they also had to ease quickly. You know, Meyer, Governor Meyer made a very prescient speech about a little more than a year ago about the possibility of a boom-bust. He said correctly, if they had to slow down the economy, which was threatening to get out of control, but he talked about the possible aftermath. And this is one of the most aggressive Fed easings we've ever seen, because they understood the process. So I think they've done a great job.</s>MARCHINI: All right. David Jones, the concern here is what's going to happen to capital spending, since that's where the weakness in the economy seems to be. It was the corporate profits and spending plans that the Fed mentioned. Will this respond to lower interest rates?</s>JONES: Not immediately, Deborah. I think this is the important point to make: that the Fed has shifted attention to something new in this slowdown which is, of course, declining profits and, most importantly, the threat that businesses will cut back sharply on investment spending. Of course, this comes on top of inventory correction, which is really quite far along, and the Fed is not as worried about. But in direct answer to your question, if we have excess capacity, we have declining profits, weakening growth. I think it's going to be some time before business investment will, in fact, respond to Fed rate cuts.</s>MARCHINI: All right. We need to take a break right here. We'll be back with more from David Jones and David Horner in just a moment.</s>MARCHINI: We're back again with David Horner, Merrill Lynch, and David Jones who's joining us from Denver, Colorado from Aubrey G. Lanston. David Horner, I guess the essential question here, with the Federal Reserve having cut interest rates rather dramatically: Have we moved in time to avert a recession? Will we see a pick up in the second half?</s>HORNER: I think we will, but it will be close. Picking up on a point that David made just before the break, the Fed is very concerned about profitability, not only because it hurts capital spending, but it also hurts employment as well. I mean, businesses cut labor, and we've seen a rise in unemployment claims. The worst is not over for joblessness. So you add the job insecurity with the pullback in the stock market -- not recently, but over the last year -- and there could be some dampening consumer consumption in the second half. That has to be offset by this aggressive Fed easing and eventually, of course, the tax cuts will begin to revive a spending. So it'll be touch and go on growth this quarter and next quarter, but by the fourth quarter, I think, we'll be picking up pretty nicely.</s>MARCHINI: David Jones, do you think we have escaped a recession?</s>JONES: I think we're just barely going to escape one, Deborah. All the risks, I think, are on the downside. And that's one of the reasons why the Fed has been so aggressive in rate cuts and one of the reasons why we got this surprise move. I think when the Fed thought about it, they simply realized that it was -- we really needed an insurance policy in this surprise aggressive easing move because, you know, almost everything you think of is giving this danger to the economy. One is this big potential cutback in business investment. The other, of course, is the diminishing wealth effect, equity wealth effect on consumption, and even the slowdown in the economies abroad. So we'll avoid a recession, but just barely this year.</s>MARCHINI: All right, David Jones of Aubrey G. Lanston joining us by telephone from Aspen, lucky devil; and David Horner of Merrill Lynch here in New York. Thank you both. TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com