Transcript: Interest Rate Roundtable

This is a partial transcript from "Your World with Neil Cavuto," August 9, 2005, that was edited for clarity.

NEIL CAVUTO, HOST: You owe, you owe more. You save, you get more. And all because Alan Greenspan (search) and his buddies hiked interest rates more, a quarter-point more, enough to send the closely watched overnight bank lending rate (search) known as federal funds to 3.5 percent, more than triple what it was a little more than a year ago.

Banks quickly started hiking their prime lending rates, which means higher home equity loan rates, higher adjustable mortgage rates and, as a salve, at least for savers out there are higher C.D. rates. And the clear message today: Not done today, not by a long shot.

Barry Habib (search) says the Fed has at least couple of more hikes down the pike. He is the CEO of Mortgage Market Guide. But former Fed Vice Chairman Preston Martin (search) says a lot more than that. Try at least six more hikes. Ditto Richard Salsman (search), the chief investment strategist at InterMarket Forecasting, who says we should expect hikes right through the end of the year.

Barry, you’re at least calmer in this rate-hike analogy. How far do you see it going and why?

BARRY HABIB, CEO, MORTGAGE MARKET GUIDE: It’s pretty simple.

The Fed has told us that we are going to neutral. That means that you take the rate of inflation, add 1.5 percent, and that’s what the Fed funds rate is going to be, plain and simple. So, if you can say the rate of inflation right now is 2.5, maybe 2.75 percent, we are going to see a Fed funds rate of 4, 4.25.

CAVUTO: So, you actually take the Fed at its word?

HABIB: Well, why not? Everything they have done so far has been exactly as planned, as anticipated. There’s not been really any surprises for the past couple of years. I think that’s what Alan Greenspan wants. This is his last term. He is gone early next year, so why rock the boat? The economy is going great. Things are terrific.

CAVUTO: Preston, as a guy who was the number two man at the Federal Reserve not too many years ago, with all deference to you, sir, I know the Fed has a history of overdoing things. You’re arguing that the Fed is going to hike a lot more than what Barry just said. Why?

PRESTON MARTIN, FORMER FEDERAL RESERVE VICE CHAIRMAN: The reason is our participation in the global economy today and the frequent trips to the Bank for International Settlements in Basel, Switzerland, which I used to make when I was on the Fed.

(CROSSTALK)

CAVUTO: Did you personally go to Switzerland with, like, a little money bag or no?

MARTIN: Yes. That’s the train station of Switzerland.

CAVUTO: Right.

MARTIN: Bank for International Settlements meets there.

And remember that our account deficit per year, our need for foreign funds to come in here and invest in our very securities will run $600 billion or $700 billion this year. And the central bankers gather there at the BIS to debate crisis management, avoid a financial crisis, like we had in the ‘80s and the ‘90s, by the interest rate policies we central bankers together participate in.

CAVUTO: All right. So, you meet there at the BIS.

But, Richard Salsman, here’s my argument. From the Fed, I think we get a lot of B.S. We get a lot of inconsistencies. They’re fighting an inflationary boogeyman, I don’t know. Maybe, with all deference to this brilliant company excluded, I don’t see and I worry and fear the Fed is going to overdo it and kill this recovery. What do you think?

RICHARD SALSMAN, CHIEF INVESTMENT STRATEGIST, INTERMARKET FORECASTING: They always do. That’s their entire history.

From the beginning of the year, Neil, we been telling clients that the Fed would bring the rate to 4 at the end of this year. Economists didn’t think that.

CAVUTO: Yes, you did.

SALSMAN: At the beginning of the year. Now, of course, they’re saying it. Our forecast now is that it will bring the rate to 4.5 by a year from now. But here’s the key. They are dead-set on squashing housing prosperity.

CAVUTO: So, that’s the bubble they want to burst, Richard? Is that how you see it?

SALSMAN: They call it a bubble.

CAVUTO: Yes.

SALSMAN: I don’t believe such a bubble exists.

CAVUTO: Yes.

SALSMAN: But they did the same thing with the stock market, as you know, in 2000. And the key here that we are telling clients is, the Fed is intent on inverting the yield curve. So, even though our current forecast is that it go to 4.50, you know, the bond yield today is 4.30. Whenever short-term rates go above bond yield, technically called an inversion of the yield curve the subsequent year performance is very bearish. I think the Fed is dead-set on doing that, and the Fed knows full well what an inverted yield curve does. Mr. Martin knows full well when he was at the Fed.

(CROSSTALK)

CAVUTO: Well, Barry, what do you make of that for your industry — the, you know, mortgage industry, the housing industry — this could be a real pain in the butt?

HABIB: Well, here’s the thing, is that, first of all, I agree with Richard in that you’re looking at a little bit over 4 percent.

I agree that there is no bubble. But the Fed has said, you know, Mr. Greenspan has called it froth, not really a bubble. And they said pockets. So, he may be in line with us as well.

But here’s the thing, Neil, is that, as far as long term mortgage rates, Fed hikes are typically good. Like today, interest rates are improving on the long end because inflation is being contained.

CAVUTO: Actually, they’re not, though, Barry. The long end has come up three-quarters of a point in a little more than five weeks.

HABIB: Well, here’s the thing. You’re correct in saying that the trend has been higher in rates. But today’s Fed action has actually settled things down.

The increase that we’ve been seeing in interest rates recently is due to some very good economic reports. And the job report was one of the catalysts there.

CAVUTO: Which is one of the reasons why — and, Preston Martin, maybe you can help me with this — given the steady spate of good economic news, the feeling seems to be, the Fed just keeps hiking and hiking and hiking and hiking. Do you buy that?

MARTIN: Yes, because, of course, the economic news is very positive. But the current account deficit is very, very negative. And the need for hundreds of billions of dollars of foreign investment to continue to flow into our economy is...

CAVUTO: Preston, that’s a brilliant point. I didn’t want to jump on you, but we are running out of time. You are saying, essentially, that, because we need foreign capital, we are going to raise rates above what would normally be acceptable just to keep that money coming in.

HABIB: Hold on, Neil. That’s nonsense.

CAVUTO: Hold on.

Preston, go ahead. Take it.

MARTIN: To avoid a financial crisis.

CAVUTO: All right, Richard, what do you think of that? To avoid a crisis, that is what the Fed is really doing?

SALSMAN: To avoid a crisis, create a crisis. The Fed is maniacally anti-prosperity.

And Mr. Martin should know that a widening trade deficit goes hand in hand with U.S. prosperity. That’s why we import more than we export.

CAVUTO: All right.

SALSMAN: You don’t want capital flight. You don’t want it to go in the other way. The Fed should not be targeting the housing market or the widening trade deficit. Those are both signs of prosperity.

CAVUTO: Richard, actually, they are just targeting you. That’s it, just you.

(LAUGHTER)

CAVUTO: Guys, I want to thank you very much. Appreciate it.

SALSMAN: Thank you, Neil.

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