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More in support of a Fed rate cut

Scott Jagow Sep 18, 2007

TEXT OF INTERVIEW

Scott Jagow: I just got some news that might make the Federal Reserve feel better about cutting interest rates today. Wholesale prices fell 1.4 percent in August. That’s the biggest drop in 10 months.

It’s a clear sign that inflation is not a huge threat right now. That’ll give the Fed more leeway to cut interest rates. Oh, and of course, that’s what investors and banks around the world want them to do. For example, in Britain, we just had the big run on the bank Northern Rock.

Let’s bring in Jamie Chisholm. He’s the deputy markets editor at the Financial Times in London. Jamie, even if the Fed cuts interest rates, it’s not like banks can just jump in and start giving money away again. So why all the clamoring for a rate cut?

Jamie Chisholm: Well, that’s a very good question, and I agree with you — I think this rate cut has more to do with the economy as a whole. I think the Fed should react to what they see is problems in the real economy. I think banks will remain cautious until we see reports, for example, by a lot of the large U.S. brokering banks this week, and they start saying like, “Don’t worry, it’s OK.”

And only then, after awhile when we see some of this toxic debt moving along the system and flowing through the pipeline, will people start relaxing a bit more. Of course, the question is, how long is that gonna take? And as you Americans like to say, they’ll just be waiting for the next shoe to drop. Which could cause mayhem in the markets again.

Jagow: And over there, is there more concern that more banks will be exposed, like Northern Rock?

Chisholm: Well, Northern Rock was a very particular bank. Their business model was such that they didn’t take much money in from retail investors — people who walked off the street and put money into the account. They were quite small, but what they did was they aggressively targeted the wholesale markets and borrowed from other banks. Now, that was the place which broke down over the last few weeks or month or so, and that’s why they got into difficulty. I don’t think there’s any other bank in the U.K. which borrowed as much relative to their size as Northern Rock did.

Jagow: All right Jamie, thanks for joining us.

Chisholm: No problem. Thank you!

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