Fed Decision on Keeping Near Zero Interest Rates: Analysis by Swonk and Kelly

SUSIE GHARIB: Joining us now with more analysis of the Fed decision, Diane Swonk. She`s chief economist at Mesirow Financial and David Kelly. He`s chief market strategist at JPMorgan Funds. Diane, David, nice to have you with us and lots to talk about. So let`s just get going. Diane, I`ll begin with you. We`ve seen month of economic reports showing the U.S. economy is getting better. Based on what the Fed said today, is it saying that it`s having its doubts?

DIANE SWONK, CHIEF ECONOMIST, MESIROW FINANCIAL: Certainly the Fed marked down its forecast from last November which was already weak. And I think what we`re seeing is what we`ve seen many times, instead of hedging in the other direction, in 2010 we thought the economy was reaccelerating and then we lost momentum at the beginning of 2011. Similar experience at the end of 2011, we finally saw a little blip in growth and there`s a fear that we`ll lose momentum again as we move into 2012 and that`s exactly what we are seeing actually out there as much of the strength was actual catch-up to earlier losses.

GHARIB: David, last night President Obama said that the economy is getting stronger and today Chairman Bernanke said that it`s too soon to say that we`re in a stronger new phase. What`s your take on all this?

DAVID KELLY, CHIEF MARKET STRATEGIST, J.P. MORGAN FUNDS: Well, I actually think the economy is doing a little better than that. I do recognize that in the first quarter growth might be a bit slower than in the fourth. But I think fourth quarter growth, we`re going to get this on Friday, could be above 3 percent. Since our last meeting, what we`ve seen is a reduction fears about what`s going on in Europe. We`ve seen consumer confidence move up some. We`ve seen a better than expected employment report for December. What`s puzzling to me is none of this was reflected in what the Fed said today. I think what they`re trying to do is they`re actually trying to talk down the economy to justify a policy of being very easy to bring down long-term rates to move up the economy and that doesn`t make any sense to me at all.

GHARIB: I don`t think it makes any sense, Diane, to the average American probably listening to all this and saying maybe the economy is in worst shape than I thought and maybe I should hold off on buying a home or a car or starting a business. So do you think that the Fed chairman is creating a crisis of confidence?

SWONK: I don`t think he`s creating a crisis of confidence, but I do understand the confusion. This is the first time the Fed has been communicating in this way and there`s going to be confusion when the Fed does that. I think what they`re trying to do and we`ll see if the theory actually works in reality, that is to set market expectations. They`re learning from Japan. They`re learning from the great depression, that if you say listen, we`re willing to reflate the economy. We think inflation is too low right now. We think unemployment is too high and we`re willing to stimulate the economy to move it back in a direction that`s more healthy, that if you do that and say that and commit to it over time that actually gets people to get off the sidelines of holding cash and get into making more productive investments in the future, riskier more productive investments, and that`s exactly what we saw in the stock market today, moving out of cash and moving into things like equities, I think is a big plus. They want to see the long-term investments pick up.

GHARIB: Let`s talk a little bit more about the markets, David, because it seemed like the market reaction was not that enthusiastic. I don`t know what your take on it is. What do you think the message of the markets today was?

KELLY: I think it was reasonably enthusiastic. We did see long-term interest rates come down. We saw some improvement in the stock market. But I don`t really buy the theory that by convincing people that rates are going to be low for a long period of time, you can somehow convince people that growth is going to be stronger, because the only way they do that is, they said economic conditions will warrant this. So they`re saying the economy is going to be really soft and you can`t say that and then tell people but we`re going to be there to help 2015, 2016. So I think it`s a mixed message here. And the other thing is you bring down rates to make it easier for people to borrow money, but you make it harder for banks to lend money and I think we have to look at both sides here because I think they`re discouraging lending even as they`re trying to encourage borrowing.

GHARIB: Do you think that`s true, Diane and also is there something more that the Fed can do or really has it run out of bullets?

SWONK: It`s not run out of the bullets. It considers its communication strategy yet another tool in its tool box and it`s one that`s been hesitant to use in its full array. Actually having inflation targeting, we saw the Fed chairman say we have an inflation target basically today of 2 percent so, they didn`t have to say we`re managing inflation expectations. They said listen, if 2 percent inflation is where we feel it should be, it`s below that, so we`ll keep working until we can get it back up and that`s to try to avoid the lesson of Japan, is to try to avoid the sense of going into it`s going to be cheaper tomorrow, you keep buying it.

GHARIB: Real quickly because we have half a minute left, David, I want to ask you this. Lower interest rates, that`s great if you`re a borrower, not so great if you`re a saver. So what should people do whether they`re an investor, a saver, a business owner? What should they be doing with their money given that interest rates are going to be low for a couple years?

KELLY: Well, I think this is a reason to be a little overweight stocks and underweight fixed income. I think there`s a lot of risk that goes into the long end of the bond market right now and stocks do look cheaper because of low long-term interest rates. So I think it is a message to investors, yes, save the money, but save the money, but then invest the money. It`s not enough to put it under a mattress. You`ve got to put it into something that`s going to grow, like the stock market, in the long run.

GHARIB: We`ll leave it there. Thank you both for coming on the program, we appreciate your time.

SWONK: Thank you.

GHARIB: We`ve been speaking with Diane Swonk. She`s chief economist of Mesirow Financial and David Kelly, chief market strategist at JPMorgan Funds.

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