Professor Richard Sylla of New York University on low interest rates
06/24/2003
CNBC: Business Center
SUE HERERA, co-anchor: To give us some added perspective on how low rates really are is Richard Sylla. He is the professor of financial markets and history at New York University.
Good to have you back with us.
Professor RICHARD SYLLA (Market Historian): Good to be here, Sue, Ron.
HERERA: You know, a lot of people don't realize the history of rates. I mean, my first mortgage rate was at 16 percent, so I--I definitely appreciate where rates are now. But is it human nature to forget the past and--and simply focus on how things are now and whether or not 4 1/4 or 4 1/2 percent is a good rate?
Prof. SYLLA: I think it is. I'm sure that you thought that when you paid 16 percent on a mortgage--that that was incredibly high pr--relative to previous history. And people who are buying--taking out mortgages now are--are getting a rate that's really quite low relative to most previous history.
RON INSANA, co-anchor:
And--and, Dick, we're--we're in a period right now where the Federal Reserve seems to be doing some historical things with respect to its monetary policy. How important is this period at the Fed, which is i--in large part responsible for the environment we see right now?
Prof. SYLLA: Well, I think it shows that the Fed is what we might call an activist Fed. I mean, when--when the economy's going up, they move quickly to s--stop inflation, as in 1994. And now when the economy's slow in the early 2000s, they've moved--you know, cut interest rates numerous times to try to stimulate the economy. And it's this latest m--Fed cutting that's produced this extremely low interest rate environment by historical standards.
HERERA: Are you at all worried about it, though, given what's going on? I mean, we're at awfully low levels.
Prof. SYLLA: I don't worry about it, but I agree with your previous guest on the show, Bill Gross, that we're pretty much at the end of an interest rate cycle. You know, I co-authored a book on the history of interest rates, and it seems like there are sort of 20- or 25-year trends in interest rates. You happen to have taken out your first mortgage when we were at the high end of that trend that produced those rates in the early '80s that are unbelievable now.
HERERA: Believe me--believe me, I remember.
INSANA: Now, Dick, when you talk about these secular trends, as we did for many years with the stock market, when the trend reverses, does it mean you go back and revisit the peak or trough from the previous period, or might we find something a little bit more comfortable in between that may rule over the--the interest rate market for quite some time?
Prof. SYLLA: Well, I would guess that we aren't going to go revisit those highs that resulted in Sue's 16 percent mortgage.
INSANA: Or my 29 percent car loan.
Prof. SYLLA: Or--right, or 20, 21 percent prime rate.
INSANA: Yeah.
Prof. SYLLA: But I think--and--and it probably won't be a quick upward move either. But I--I believe the economy is recovering. Maybe I'm even a little more optimistic than Bill Gross. And so w--when--as that happens, the demand for credit will go up. The Fed has created a lot of liquidity. And so probably the next big statement that we'll notice is that they're leaning a little bit toward tightening, maybe not right this summer, but I wouldn't think it's too far off in the future.
HERERA: That was my question. If it's not right away, what--do you have a time frame for when you think the Fed might change its bias?
Prof. SYLLA: Oh, I--well, I think--let's suppose their policy works, and by the fall--you know, a lot of people expect the economy--economic recovery to be in full swing by the fall. Sometime this fall that might happen. By then, probably mark--the markets will al--already have pushed rates up some.
INSANA: But--but, Dick, factories are only operating at 75 percent of their capacity right now. The Fed historically doesn't even talk about tightening until they're north of 85 and sometimes even 90 percent. So might we have just a protracted period where rates stay steady and the Fed is secure that the economy is recovering before they even make mention of--of a change in policy?
Prof. SYLLA: It's possible, although the markets will move first and the Fed will probably follow.
INSANA: Right.
Prof. SYLLA: As the economy improves, the market will raise rates, and then the Fed will have to stay in touch with the market. Of course, next year is an election year, so the Fed has to be careful that it doesn't get involved in the election campaign by doing things that one or the other party doesn't like.
HERERA: And that's a topic for a whole 'nother night of discussion. We'll leave it there.
INSANA: Mr. Greenspan raised rates before the first Bush's election.
Prof. SYLLA: That's right.
HERERA: That's exactly right.
Thank you. Good to have you back with us.
Prof. SYLLA: You're welcome.
HERERA: Our thanks to Richard Sylla of New York University.
Still to come on BUSINESS CENTER, making ends meet with parking tickets. It could be an annoying fiscal policy in a city near you. Pumping the meters when we come back.