Evaluating Interest

Federal interest rates are at historic lows, and according to Tufts graduate Robert Hormats, they are likely to stay that way for the next quarter.

New York City [11-17-03] After a long downturn, rising economic activity in the third quarter may be a sign that the economy is posting a cautious recovery. But does this mean that Federal interest rates – now at historic lows – are going to rise? Not according to Tufts graduate and vice chairman of Goldman Sachs International Robert Hormats.

“I think the Federal Reserve is going to wait a long time before raising interest rates in this environment,” Hormats told CNBC’s News With Brian Jennings. “There’s still a lot of unemployment. There’s still a lot of underutilized capacity.”

Hormats – who earned an undergraduate degree in political science and three degrees from the Fletcher School at Tufts – told the news program that while the economy may be looking up, a full recovery is not in store until the unemployment rate goes down.

“The key point to watch for is what happens to employment,” said the Tufts graduate. “The jobs factor in this recovery has been a lagging one. The economy has really not created a lot of jobs, in part because employers are very cautious -- they’re not sure how durable this recovery is -- and in part because there’s been a huge increase in productivity so they can produce more goods with fewer people because of new technology and new ways of doing things.”

A renowned financial advisor who has counseled Presidents Nixon, Ford, Carter, Reagan and Clinton on the economy, Hormats said that President Bush’s tax cuts may have aided the current turnaround.

“I think the tax cuts have been very important. A lot of people benefited from the child tax credit,” Hormats told CNBC. “Withholding taxes have been cut, so more people have money in their paychecks.”

The Tufts graduate – who serves on the Board of Overseers for the Fletcher School – said that the Federal Reserve policy of keeping interest rates low has also helped renew the economic pulse in the third quarter.

But Hormats warned that the U.S. economy is not out of the woods just yet. Consumer confidence and spending – especially during the holiday season – will have a heavy impact on whether the current trend will turn into a sustained recovery.

“I think it still remains to be seen how strong the American consumer is going to be. I think the American consumer will be relatively robust,” Hormats told CNBC. “But we’re getting a lot of warnings from department stores, from big chain stores that the consumer may not plunge in there.”

The four-degree Tufts graduate added, “Consumers have a lot of debt. And that’s all right when interest rates are going down. When they start going up or people thing they’re going to go up, they’re a little more cautious about incurring debt, and that could be a negative factor.”

As far as the stock market is concerned, Hormats said that investors are going to be watching their investments.

“Investors are going to look at several things. One, their concern: Is the Fed going to raise rates? And I think they can be reassured on that. Two, they want to see unemployment go down further to sustain the recovery. And three, they want to see corporate spending continue to be strong,” said Hormats. “Whether it’s going to continue or not is going to be a critical variable for stock market investors.”