Valliere: Fed May Deliver 'Holiday Surprise' to the Markets
DAVID HAFFENREFFER, CNN ANCHOR: Well, George W. Bush's plan for a huge tax cut package is likely to be one topic of conversation this morning when the president-elect sits down for breakfast with Alan Greenspan. Greenspan has said government surpluses should be used to pay down debt rather than pay for tax cuts. But the Bush camp has argued that tax relief is a kind of insurance against recession. The Bush/Greenspan breakfast comes just a day ahead of the Fed's meeting on interest rates. The Fed must weigh its response to a slowing economy, and some are speculating that it may make an aggressive move. In fact, the "Wall Street Journal" reports that some Fed insiders are debating a rate cut now rather than waiting until next year.</s>DEBORAH MARCHINI, CNN ANCHOR: Well, one of the best things the president-elect has going for him, it seems, is not what you might have thought.</s>HAFFENREFFER: Here now with more insights on this, ahead of this Fed meeting tomorrow, is political economist Greg Valliere of Charles Schwab Washington Research Group. And there is that piece in the "Wall Street Journal" today speculating that perhaps the Fed may move as soon as tomorrow's meeting. A planted story perhaps?</s>GREG VALLIERE, CHARLES SCHWAB WASHINGTON RESEARCH GROUP: I think the story is a plant because the "Washington Post" story of last week may have been too gloomy about the prospects for a rate cut. I tell you, David, we have been talking our clients for the last two or three weeks we think there will be a rate cut tomorrow. A former Fed governor, Lyle Gramley (ph), a dear friend and a consultant of ours, feels that the evidence is compelling everywhere you look for a rate cut right away. You've got a recession really in the auto and computer industries, you've got inventories piling up, you've got mediocre consumer spending, you've got a terrible stock market. I think Greenspan realizes if he doesn't move tomorrow, he may have to do 50 basis points at the end of January, which could look panicky.</s>MARCHINI: All right, that being the case, what would you expect the market's reaction to be. It does not appear that's been priced in?</s>VALLIERRE: I think a very happy Christmas surprise, a holiday surprise, to get a rate cut from the Fed. I think many people are starting to worry, as David Jones said on Friday, that the Fed is getting behind the curve. And I think that, if the Fed shows tomorrow they realize this economy needs stimulus, I think it would be a wonderful gift for the stock market.</s>HAFFENREFFER: Ahead of that meeting, we do have Messrs. Bush and Greenspan sitting down for breakfast today. These two families have a bit of a history here. What is likely to be the tenor of that conversation?</s>VALLIERE: Well, first of all, in the history, as you know, Bush the elder left on very rocky terms with Greenspan. In fact, Bush's treasury secretary, Nick Brady, was barely speaking to Greenspan when the Bush administration ended. I think, clearly, they'll bury the bad feelings. I think that they'll make it clear that they have to work together. And I think that Greenspan might indicate that a modest tax cut is perfectly acceptable for him.</s>MARCHINI: Is he softening his stance on that, in view of the new administration?</s>VALLIERE: I think so, Deborah, for a couple of reasons. Number one, we do have a weakening economy. You've got to say that Fed rate cuts are more potent for a stimulus than a tax cut. But the economy is weakening. And number two, as you guys have heard me say for the last couple of years, the surplus estimates are still too pessimistic. And we're going to get another surprise in the next few weeks showing that the surplus for this year and next is going to be enormous. In fact, we're telling our clients that, in the next fiscal year, we could be looking at $400 billion as a budget surplus.</s>MARCHINI: Even with a slowing economy?</s>VALLIERE: Yeah, even with a slowing economy and a little more spending. So, surely, out of $400 billion for the upcoming fiscal year, there's going to be some money for a modest tax cut.</s>HAFFENREFFER: We've had President-elect Bush making some Cabinet appointments already. It was sort of as expected so far?</s>VALLIERE: Well, I think it's important for him to show diversity. He's done that. I think the big one that every one in our business will be looking for is the Fed. I think you've got to get someone who gets along with Greenspan and the markets. Everybody has a leak, whether it's Bill Bradley or Bill Archer or people from Wall Street, I have no inside information, but I think it's got to be somebody who has some market savvy.</s>MARCHINI: Yeah, that's for the treasury secretary post...</s>VALLIERE: Yeah.</s>MARCHINI: ... which is so critical as a liaison with the Fed. When you look forward, what do you see, in terms of tax relief possibly? where would it come?</s>VALLIERE: Well I think in several areas where Democrats would go along. You could get marriage penalty reform. That's a no brainer in my opinion. You could get reform of the estate tax laws, probably not abolition of the estate tax, but a lot of Democrats from the farm belt would love to see that. Maybe some modest rate relief. Certainly some savings incentives for ROTH IRAs and 401(k)s. There's enough agreement on some of these provisions to drive an entire bill, I think, by mid to late spring.</s>MARCHINI: That's pretty remarkable. OK, Greg Valliere, good to have you with us, Charles Schwab Research Group.