Interview: Middle Tennessee State---Ford, William---Finance Dept. Chairman
>> we are moving ahead with our coverage of the fed’s decision on interest rates and the accompanying statement. we’re now joined by william ford, former president of the federal reserve bank of atlanta, currently chairman of the finance department at middle tennessee state university. dr. ford joins us from nashville, welcome.
>> hi, lori.
>> we’re hearing today’s statement described as lucid, verbose. what do you think of the statement and did it make a difference, mark a significant difference between mr. greenspan, whom you’ve known for 30-some years, and the current fed chairman?
>> it was a surprising statement in the sense that a lot of people, as you have reported, were expecting them to be a little easier on what they’re going to do in the future than the statement that they delivered. as everybody knows, it’s going to be data-dependent from here on out and the only question is which data matter the most and when does it hit and how will that affect the markets .
>> do you think there was a reason perhaps why bernanke came off more hawkish than some expected, in an effort to make his own statement, to separate himself from his predecessor?
>> well, sure, he has to establish his anti-inflation credentials, lori, in a couple or three meetings in a row to make sure that everybody knows he’s not going to be soft on inflation or weak on keeping inflation under control. so he’s just sort of laying the groundwork for building, trying to build a reputation like greenspan’s in that regard.
>> so it looks like we will get a may rate increase. fed funds futures traders see a 22% chance of another rate increase in july. what does the statement say to you about the fed’s tightening bias?
>> it’s obvious that if they continue to see some of the inflationary signals that we are seeing, in spite of the core inflation rate for january being up only 1.8% since last year, the problem is, when you look at other indicators of inflation, which the rest of us look at, including energy, since we all do drive our cars, and food, since we all do eat, that index, the broader c.p.i’m, as you • broader c.p.i., as you know, is going up more than the core c.p.i. and the trend in energy prices is clearly straight up.
>> stock markets sold off today. do you think that the markets weren’t prepared to the sent of -- to the extent of which bernanke was concerned about inflation? is this a bigger worry than perhaps we realized?
>> yeah, i think the markets were a little bit surprised by it, although there is quick reaction and the markets may taper off over the next few days as they digest and understand that he’s not going to go wild in raising rates. i’m not looking for a 6% fed funds rate any time in the future.
>> let me ask you for your outlook. bernanke in the statement cites concerns with resource utilization, higher energy, oil-driven inflation. what’s your outlook on inflation?
>> well, i think we’re going to continue to see inflationary pressures as these energy prices filter through into more and more areas. hopefully, we’ll see housing inflation taper off from the high levels of price increases we’ve seen. hopefully if we don’t have any weather disasters to hurt food prices, that may level off a little and if all those good things happen in the next eight weeks or so, maybe they’ll lighten up when we get to june, do one more increase and tell us―give us word that they’re getting ready to stop. that’s what we’re all hoping for but you don’t know because they’re going to be looking at in the middle of april on the 18th and 19th, you get the producer price index and consumer price index, you get the employment report on april 7. you get a bunch of other data coming in between now and the next meeting, that are the things that they will look at in a data-dependent mode.
>> so those are some of the key data points. we know that the fed is data dependent and we’ll be focused on them. as we continue to go through the statement today, i’m told that the statement itself is 50% longer than greenspan’s last statement. is that interesting at all to you?
>> well, that’s what you get when you deal with college professors, you know. until a few years ago, ben bernanke is one of the most brilliant economists in america and college professors, myself included, tend to be a little wordy if somebody doesn’t muffle us a little and hopefully they’ll keep the statements a little shorter and try to be as clear as they can given the uncertainty about the data that they are reacting to.
>> what about―go on, i’m sorry.
>> i was going to say, there’s a little bit of a danger that he speaks english very clearly, which is a little different than alan greenspan. so he may have to come up with some words like “conundrum” or “irrational expectations” to fully fill greenspan’s shoes going forward.
>> bill ford, we appreciate your analysis. thanks for being with us.
>> nice to be with you, lori, bye.
>> bill ford is the former president of the federal reserve bank of atlanta. a recent poll found that most americans say c.e.o.’s make far too much money but a new study shows some companies support excessive executive pay. a full report on so-called pay enablers when “after the bell” continues.
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Listen Market briefing --- Lori (slow)
Interview: Burnham Securities---Healy, David---Auto Analyst
Fed --- Mike (fast)
Lennar --- Bob (fast)
federal reserve raises interest rates a quarter point to 4.75%. saying “further policy firming may be needed.” we’re going to go to our economic editor, michael mckee, for details on the statement and see what the fed does next with former atlanta fed bank president, william ford. first, a look at how the fed decision affected the equity markets , we’ll look at the closing numbers. all three benchmark indices falling sharply today at 2:15 eastern time when the decision was announced. all 30 members of the dow closed lower today, dow losing 95 points -- news after the bell from general motors which missed the march 16 deadline to file a report with u.s. regulators. now the automaker saying it will modify several years of financial statements for its home mortgage unit. in the 10-k filing, gmac said it’s uncertain whether g.m. will sell a stake in the unit. g.m. will restate cash flows for 2004 and 2003 as well as for select quarters in 2004 and 2005 for the residential capital corp. home mortgage, part of the general motors acceptance corp. finance unit. g.m. said it was is it studying the cash flow issues. the regulatory filing said the restatement won’t affect residential capital’s net income. we want to get reaction. we have david healy, analyst with burnham securities, joining us on the telephone. david, thank you.
>> nice to be here.
>> if you could give us context on what this news means.
>> almost nothing. if g.m. wasn’t in the middle of huge losses and layoffs and management problems, you know, a minor bookkeeping adjustment like this in a small subsidiary of a company would pass totally unnoticed but we got a media feeding frenzy right now about any possible news from g.m. and so everybody’s getting all excited. i do think cleaning up this, what is essentially a housekeeping item, no change in cash or earnings or cash fro, just a reclassification of items in a cash flow statement, getting this cleared up does have some significance but its only significance is that it’s another minor problem gotten out of the way so that g.m. can proceed with the negotiations to sell a 51% interest in its finance subsidiary, gmac, to the group, the kohlberg kravis roberts-citibank group, in other words, clearing a small obstacle out of the way to the big deal.
>> to what degree does this rebuild the reputation that general motors and rick wagoner perhaps lost when the restatement initially came out?
>> these are tiny housekeeping items, including the restatement of earnings that general motors, the auto company, had to do. they’re tiny items. they’re years ago. you know, if the company was trying to mislead wall street by overstating earnings, they were sure doing hell of a poor job of it.
>> does it address, trying to squeeze the sponge here, any of the liquidity questions you might have had about g.m.?
>> no, because this accounting item has nothing to do with liquidity. no change in cash or cash flow but moving an item from one section of the statement to the other and the totals are all the statement. so really it’s totally insignificant for g.m. only significance is that it might speed up the big deal a little bit.
>> do you think we’ll see a stock reaction on g.m., gmac?
>> if the analysts and regulators are paying attention, there shouldn’t be any reaction.
>> david healy, we so thank you for your time.
>> nice being here.
>> he’s an analyst with burnham securities. what was it that got stock investors so exercised? let’s bring in michael mckee for more on the fed decision and the accompanying statement.
>> it was the fed’s statement that got people on wall street going today and sent markets to those big losses. ben bernanke joining alan greenspan and paul volcker in establishing his inflation-fighting credentials by voting to raise rates at his first policy meeting. today quarter percentage increase, the fed’s 15th consecutive, takes the overnight lending rate to 4.75%, the vote, unanimous. but today’s meeting was never about today. but investors have been looking for clues as to what the bernanke fed will do next. in their statement, the policymakers offered a balanced outlook, saying -- economic growth as rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace. as yet, the runup of prices in energy and other commodities appears to have only a modest effect on core inflation. ongoing productivity gains have helped to hold unit labor costs in check. the statement says possible increases in resource utilization in combination with the eleratethivated prices of energy and other commodities have the potential to add to inflation pressures. some further policy changes may be needed to keep the risks roughly in balance. that’s the same language the fed used in january at greenspan’s last meeting as fed chairman. analysts say it suggests no change in the fed’s outlook which has been and apparently still is that if the economy stays strong, rates may still have to rise. still, for all the concerns on wall street, fed funds futures up just a couple of basis points today, pointing to just one more rate rise for now. back to you.
>> thank you, mike. today’s fed comments took the steam out of stocks. let’s go to deborah kostroun at the new york stock exchange to check the damage. deb?
>> stocks closing near their lowest level of the day. in fact, stocks made a big turnaround after comments from the fed. those comments pretty much told us the fed will likely still need to raise interest rates, that, of course, sent bond yields higher and also caused interest-rate-sensitive stocks to turn lower. a good example is the amex broker/dealer index making a big turnaround to go lower after the comments. what you did see, not only money managers, but also insurance companies, as well, and other financials, even the banks were lower. brian fabbri, chief economist with b.n.p. paribas saying this clearly indicates they are likely going to raise rates again in may and he says that at 5%, that’s likely going to be terminus for the fed’s series of interest rate increases. we also had another report on consumer confidence in march, jumping to the highest level in almost four years. driven by a labor market helping to lift american incomes. while that’s certainly good news, it adds more fuel to the fire that the fed will likely need to continue to raise interest rates. you saw many of the retail names actually sharply lower, still on concern that the fed likely to ng to be needing to increase the interest rates. and crude oil at our highest level in eight weeks, $66.07 a barrel. energy stocks among the very few winners in today’s market . you saw integrated oil and oil services higher. tobacco companies including philip morris, they wonan arbiter’s ruling that may allow them to reduce payments to states under their 1998 healthcare settlement. general motors started firing workers at 30 u.s. locations, part of their north american restructuring plan. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> deborah mentioned crude oil. futures surged to their highest price in about two months today as analysts forecast another drop in the nation’s gasoline supply. nymex crude oil futures ended the session at $66.07 a barrel, an almost 3% gain. it was an across-the-board rally with gasoline once again taking centerstage. nymex gasoline futures surged to their highest price in almost six months. gasoline trading remains volatile as investors anticipate an upcoming shift in gasoline additives which could cause shortages this summer. the latest bloomberg survey of traders and analysts shows tomorrow’s government report will likely show gas stockpiles fell for a fourth straight week.
>> gasoline is suppose to draw almost two million barrels so that could be bullish also. we’ll get a draw in gas, coming into gasoline season but you have to look at crude oil, 10% above where we were last year, stockpiles domestically in this country, still plenty of crude.
>> fimat’s mike fitzpatrick says the prolonged shutdown of the refinery in the virgin islands and ongoing violence in nigeria keeps traders nervous. matt simmons, chairman of energy investment bank, says we should brace ourselves for much higher prices ahead.
>> i think my message has been pretty steady drum, the same, we need to appreciate $55 a barrel is preposterously cheap and it’s going to go higher because demand is pulling away from supply.
>> traders and analysts say a key aspect of tomorrow’s energy department report will be the refinery utilization rate. our latest bloomberg survey shows refiners probably operated just above 87% capacity, 4% lower than this time last year. we’ll continue our coverage of the fed’s decision on interest rates and the statement, with william ford, former president of the federal reserve bank of atlanta. next, on “after the bell.”
