This is a rush transcript of "Special Report With Brit Hume" from August 15, 2007. This copy may not be in its final form and may be updated.

(BEGIN VIDEO CLIP)

SAM STOVALL S&P SENIOR EQUITIES ANALYST: The reason why they did do something quickly was to show the market that yes, they are not asleep at the wheel, they are paying attention, and they are willing to do whatever is needed to make sure an orderly business flow is maintained.

But, at the same time, they are indicating that because something has needed to be done, that there are increased concerns about the health of the economy.

(END VIDEO CLIP)

BRET BAIER, GUEST HOST: Well, that's one analyst's take on the Federal Reserve cutting the discount rate on loans to banks by a half a percentage point. It did have a move on the market today. The Dow Jones Industrial shot up right after the move about 300 points. At the closing bell today ended up about 230 up.

So what did this all mean? Was it enough? And what is next? Now some analytical observations from Fred Barnes, Executive Editor of The Weekly Standard, Nina Easton, Washington Bureau Chief of Fortune Magazine, and syndicated columnist Charles Krauthammer, FOX News contributors all.

Fred, was this enough?

FRED BARNES, EXECUTIVE EDITOR, WEEKLY STANDARD: It was enough for what it was aimed at dealing with, and that was financial markets. It did stop the bleeding. As you note, DOW went up 230 points, back over 13,000, which is good. Still 1,000 points below what it was a few weeks ago.

But then there is the other part, and that is the real economy itself. One of the tests of Ben Bernanke, the Fed Chairman, is not just whether he can get the financial markets in better shape and a little more orderly, but whether he can protect the real economy.

Here is where he has to head for something else. Not just a discount rate cut, but a cut in the federal funds rates, which will reduce interest rates in the country and stop the economy from going into recession.

And he has had on the table this report from the Philadelphia Fed that says the economy is not growing at all. The Fed noted with this action that the downside risk to growth had increased appreciably. That argues for an interest rate cut.

BAIER: Let's take a look at that Federal Reserve statement today.

"Financial market conditions have deteriorated, tighter credit conditions and increased security have the potential to restrain economic growth going forward."

And, as you mentioned, the judgment now downside risks to the growth have increased appreciably.

We heard from the Fed, Nina, again and again and again, about inflation, and now downsize growth. That is a different message.

NINA EASTON, WASHINGTON BUREAU CHIEF, FORTUNE MAGAZINE: A big policy switch here. The Fed has resisted interest rate cuts this summer, largely because of inflation. Keeping inflation under control despite high energy costs and high housing costs has been something that the administration certainly can trumpet as part of the good news about the economy.

What we saw today was the big 'R' word in the air, possibly "recession." Could that happen? No one is talking about that. But the fed did raise concerns about a slower growth rate, and took this action, which is fairly surgical. It wasn't a sweeping as a rates cut.

And down the road, we will see, as Fred said, a federal funds rate cut, which will have a more direct effect on consumer lending.

BAIER: And, Charles, that meeting is September 18, and a lot of people are predicting that the federal funds rate will be cut. But is this all because we just don't know how deep the subprime problem, the mortgages really goes?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: It was a way to cauterize. And since nobody know how deep it is--essentially, the best description of what was done was by economist Herman Stelts on the Weekly Standard, which said it was a surgical strike rather than a carpet bombing.

The carpet bombing would be a reduction in the federal funds rate, which would loosen loans up for everybody, which is unnecessary now. It looks as if--and which could defeat inflation, because over 2 percent, you have a strong economy, strong industrial sector, low unemployment. They are worried about that.

What Bernanke did in the surgical strike is to open the discount window, which is where you can go and get a loan from the government, but you pay a penalty. It's a half a percent higher than the normal Fed funds rate. So the only ones who go are the ones who are in trouble.

And the Fed had said it will accept as collateral this lousy paper, these mortgage backed loans which other people are holding, which nobody else will accept as collateral.

So it is away to let the Countryside, the Federal, and the other in trouble lenders get the cash out of the Fed, and be able to actually operate, and have the time to put their houses in order.

It looks as if it's a smart move--targeted. And if it has an effect, there will not be a need for the reduction in the federal funds rate.

BAIER: The free-marketers, really, are not out there anymore. Most people believe this is the right move? Getting involved?

BARNES: It has nothing to do with the free market. We do have a Federal Reserve. This is what it does.

BAIER: Well, sure. But there are a lot of people who said it wasn't a good thing from the beginning.

BARNES: I know, but that was 100 years ago.

Look, the question is what the federal government does, what might the president propose? Is he going to propose a big bailout for lenders who may lose their houses? I don't think we are at this point now, but it is something you have to worry about.

There is a breathing space here for banks to deal with some of their bad loans. We will see what happens with them.

But look, the Federal Reserve's job is to regulate the money supply and make sure there is enough money there for the economy to be growing and financial markets to work. This is what it does. This is not big government or little government, it is just plain government.

BAIER: The next step?

EASTON: The next step, again, I think is the question of whether they will cut the federal funds rate, which is a more direct impact. But they have to weigh that against concerns against inflation.

And I think they are going to wait and see how this settles down in the next couple of weeks. But even in the next couple of weeks is not going to determine how far and how deep this subprime mortgage problem is.

This is something that is going to play out over the next couple months, several months. And as Secretary Paulson said this week, you are going to see investor losses, you're going to see companies going out of business. He thinks the economy can absorb it.

And, more importantly, the global economy is stronger than it has been in previous turbulent periods. So that's what they are hoping for. But, again, stay tuned. This is not over by any means.

BAIER: A wild ride.

We have to take a break here. But when we come back, is there a renaissance in U.S.-French relations? Our panel will talk about the cozy trans-Atlantic connection when we return.

(COMMERCIAL BREAK)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES OF AMERICA: I respect the people. I respect the history of France. We have had disagreements on Iraq, in particular. But I have never allowed disagreements to not find other ways to work together.

NICOLAS SARKOZY, PRESIDENT OF FRANCE: Do we agree on everything? No. There are disagreements, but we are still friends nevertheless. That is the truth.

BAIER: That's the truth. The recent visit last week by French President Nicolas Sarkozy to Maine, visiting with President Bush. It seems like better U.S.-French relations. What does all this mean?

We're back with our panel. Charles, it seems pretty cozy, doesn't it?

KRAUTHAMMER: Well, we've had the mantra from the Democrats that the administration has destroyed our alliances, alienated Europe.

This is nonsense. If you look at the changes over the last couple of years in Germany, and in France, in particular, essentially the heart of old Europe, the changes have been in our favor. You had Schroeder leaving, Merkel coming in, in Germany. Schroeder was not only anti-American, he ran anti-American in his campaigns. But he ended up as a stooge of Vladimir Putin. He is not working in the oil company in Russia.

In France you had Chirac, who had an allergy to anything Anglo-Saxon replaced by Sarkozy, who is a self declared friend of America. In fact, the Foreign Minister of France, which is a fact under-reported here, is a man who supported and supports the invasion of Iraq on humanitarian grounds. That is the Foreign Minister of France.

In Britain we have a close ally, and, of course, the east Europeans are tight with us. Essentially, we have a very strong western alliance. In part, of course, it has to do with the rise of Russia, and the saber rattling that the Russians have done, which has reminded Europeans that we are not at the end of history and they have enemies, and it is good to have America around as a friend.

BAIER: Just today we talked about the Russian President Vladimir Putin sending out the strategic bombers again on long-range patrols. Nina, do you think this is what is uniting a different kind of relationship with France and others?

EASTON: It is aiding a more united relationship. And, as Charles mentioned, it is also a change in the helm--both in France and in Germany you went from two leaders who actively opposed the Iraq invasion. We also, from our point of view, or from our perspective here in the U.S., you had Donald Rumsfeld deriding those nations as old Europe, and I don't think that helped relations either.

We have a Secretary of State, now, Condoleezza Rice who is very active, and very active both in Europe and elsewhere, but especially in Europe. And I think that has played a role in better relations.

It is going to be tested, though. It is something that is going to be tested over Iran and Iran's nuclear program. And it is going to be tested in Afghanistan. It going to continue to be tested over Iraq.

But I think both regimes in both of these countries have an interest in seeing a stable Iraq now that we are there.

BAIER: Fred, how does this play politically?

BARNES: Well, I think it plays well for Sarkozy, among other things, and also for George Bush. But, look it just makes sense. Chirac went to a great extent to alienate the United States and to work against the U.S. in world affairs, particularly in Iraq and the U.N. resolution. Its foreign minister traveled all over the world campaigning against the U.S. to get people in the Security Council to vote against a resolution authorizing war.

You talk about developing hostile relations. It was mainly done by the French, I think, and Sarkozy is straightening that out.

I wonder what did President Bush mean when he said he respects the history of France. What does he respect? All those wars they lost? World War I and II? 1870? What is it? He likes the French Revolution, when they were chopping off all those heads?

KRAUTHAMMER: I think, in his defense, he probably meant Lafayette, which is the one you can point to. Not a lot, but it is a big one.

BAIER: Charles, Senator Kerry in his race for the presidency said that he wanted to really build international relations, and said George W. Bush just can't do it. So does this turn that on its head?

KRAUTHAMMER: Yes, it does. It was nonsense to start with. We had a disagreement on a policy, which was exacerbated by the leaders of Germany and France. And now that the policy in Iraq is in place, and everybody has to accept the consequences.

NATO is helping us in Europe, in Afghanistan, the first time ever out of area in a war. This is all under the supposedly unilateralist Bush administration. I think it is good diplomacy, and it has had a lot of success.

What we are seeing with Putin sending out strategic bombers, that is Dr. Strangelove stuff. We haven't seen that since the 1950's. It is a useless weapon, but it a way of tweaking us over out installing the missile defenses in the Czech Republic and in Poland. It is a way of asserting Russia's power, but it reminds Europe that it needs America as a friend.

BAIER: All right, that is the last word. We will be watching that one.

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