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Special Report

The Mind of the Market

This is a partial transcript of "Special Report With Brit Hume," April 21, 2005, that has been edited for clarity.

Watch "Special Report With Brit Hume" weeknights at 6 p.m. ET

BRIT HUME, HOST: Well, you wouldn't have known it by today's market, but the air lately has been full of gloom and worry about budget deficits, trade deficits, interest rates and inflation, not to mention the recent levels of fuel prices and the widespread view that they won't be coming down any time in the near future.

For more on this, who better than FOX News business managing editor Neil Cavuto, who is host, also, of course of "Your World With Neil Cavuto."

Hi, Neil.

NEIL CAVUTO, FOX NEWS BUSINESS MANAGING EDITOR: Hey, Brit.

HUME: So, first of all, today's market, I guess, was about some good earnings reports?

CAVUTO: Yes, it was the same type of good earnings news we've steadily been getting a lot of over the last few days. But this time they decided to pounce on it.

And really, you had the typical catalyst in the technology field. You had Nokia and Motorola. By the day's end, Google, the big Internet search engine. And that was just fueling sentiment here that maybe we had been a bit too negative on the state of corporate America.

But inflationary fears are still out there. Alan Greenspan still mentioned them. We just choose, not today, at least, to focus on Al.

HUME: All right. Let's talk about that for a minute.

Greenspan was warning today about all of these entitlement programs that are lying out there, waiting for us, with Social Security as one of them, Medicare, Medicaid and others, all of which are expected to result in enormous expenditures and obligations that would become a burden on the taxpayers. Because there's no other place to get the money.

CAVUTO: Right.

HUME: So, question. Is this what's been weighing on the markets and weighing, perhaps, to some extent on the economy as well?

CAVUTO: I don't think so. I don't think his remarks in and of themselves were any headline-grabbing statements.

I think he said what we all had long suspected, that if Washington continues to go merrily the way it's going, there's going to be a piper to pay. And he's right on that.

HUME: Well, is that what -- is that what has been on -- I mean, lately, the market has been tumbling. Is it that stuff and the fact that the president doesn't seem to be getting very far with his efforts to make changes in Social Security? Is that what has been worrying traders?

CAVUTO: I have a bit have a different view on this, Brit. I don't think the deficits really matter to the markets. I know that sounds, maybe, perhaps heinous, but I think the markets are more concerned about interest rates.

As we know, we've had deficits in the past and they didn't lead to higher interest rates. So I don't think that is an issue.

What I do think is an issue here is this suddenly reinvigorated economy, commodity inflation picking up, energy inflation minus the last couple of days with oil prices picking up. And that the Fed is really behind the 8-ball on this one and has to recognize that it might have fallen behind the curve.

I don't buy that. But I think the sentiment seems that be that the Federal Reserve is going to have to pick up the pace of interest rate increases.

When we got the minutes of their March 22 meeting, we seemed to get a clear indication now that the Fed is more inclined not to just raise a quarter point a meeting, but maybe a half a point now and then. And that really jarred these guys, because nothing so scares a market, unless the cost of money goes up. And the cost of money has just gone dramatically up.

HUME: Well, let me just see if I understand that clearly. What happens in a situation like this is that an economy is growing.

CAVUTO: Right.

HUME: And the Fed is supposed to have a watchful eye on price levels and other things that are indexes of inflation, because inflation is the real market killer and the real economy killer.

CAVUTO: Right.

HUME: So a central banker like Volcker -- I mean, Volcker, or in this case, of course, it's Alan Greenspan, will feel the need along the way to raise interest rates to keep the economy from overheating and from inflation from breaking out.

CAVUTO: Right.

HUME: And the worry is, that if that breakout gets ahead of him, or ahead of the Fed, that the -- that they would have to be -- there then has to be a rapid run-up in interest rates, which very often tanks the stock market and can lead itself to a recession. Correct?

CAVUTO: That's right. You said that better than any of the guests I've had on my show.

But in order to prove their monetary manhood, a lot of these central bank chiefs, the world over -- and you mentioned Paul Volcker, now Alan Greenspan -- they will kill the economy if need be to kill inflation. And no one should mistake that, Brit.

When the Fed is left with a choice between inflation and maybe potentially killing the recovery, whatever you want to call it, they'll kill inflation. Because they know longer term, more foreign money will have faith in your markets if you have inflation under control than if you necessarily have a great economy.

HUME: Well, let's get...

CAVUTO: And Brazil and Argentina certainly are proof of that.

HUME: Exactly.

Well, let's get to your judgment on the level of inflation. I mean, there's been some indications in price levels and other indicators that inflation may, indeed, be threatening us. How serious is the threat, in your view?

CAVUTO: I don't think it's serious, Brit. And I think the Fed risks torpedoing this recovery to chase a ghost that I don't even think is there.

I think before you really see the whites of inflation's eyes, you don't necessarily shoot out the eyes. And I think there is a real risk here. And it's been expressed to me by many on Wall Street, that if the Fed, every six weeks at these FOMC powwows is hiking rates, where does it end?

HUME: FOMC being?

CAVUTO: The Federal Open Market Committee. I apologize.

HUME: That's where the actions get taken that...

CAVUTO: That's where the Fed governors and the district presidents decide the course of interest rates. And they have been on a steadily climb up from 1 percent at the low, to close to 3 percent right now.

And the feeling seems to be, when next they meet, it's going to go up to 3 percent, 3.25, 3.5, we don't know. They say the real equilibrium is probably 4 percent, 4.5 percent. I had one person today say 5 percent.

I'm not smart enough to know, Brit. But I think that it can get overdone.

HUME: All right. Neil Cavuto giving us something to worry about and think about.

Thanks very much, Neil. Great to have you.

CAVUTO: Thank you, Brit.

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