At these rates, what’s next?

Amy Scott Sep 18, 2007
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At these rates, what’s next?

Amy Scott Sep 18, 2007
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KAI RYSSDAL: It took four years, two months and 23 days, but who’s counting. The Federal Reserve finally saw fit to cut interest rates today. That fact itself isn’t really so surprising, given the summer we had with the liquidity crunch and all. What really caught people unawares, though, was what rates the Fed cut, and by how much. Marketplace’s Amy Scott explains.


Amy Scott: The federal funds rate is the interest rate banks charge each other on overnight loans. The discount rate is what banks pay on short-term loans from the Federal Reserve. By slashing both, the Fed hopes to stave off any damage to the economy from the recent market turmoil. Nariman Behravesh is chief economist at forecaster Global Insight. He says employment is slowing and consumer confidence is getting shaky. Today’s report that wholesale prices fell last month gave the Fed even more reason to cut.

Nariman Behravesh: I think there’s no question that the balance of risks has shifted from inflation to recession. All of a sudden the risks of the downside became much, much greater.

Analysts were surprised. Brian Gendreau is a strategist with ING Investment Management. He expected to see a smaller rate cut with hints of more to come. Instead, he says the Fed’s statement suggested investors shouldn’t count on further interest rate cuts.

Brian Gendreau: The way I read that is that what they will do is they will take these cuts back in the future. They’re gonna take a wait-and-see attitude and they’re gonna react to the data as it comes out.

Even so, Wall Street cheered the Fed’s move. The Dow jumped 200 points within minutes of the announcement. But not everyone is celebrating. James Swanson of MFS Investments says the low cost of borrowing is what got us into this whole mess.

James Swanson: And to suddenly lower it and not let these financial institutions that made these imprudent decisions feel the pain . . . I wouldn’t call it a bailout. I would call it a temporary fix.

And it won’t solve troubles in the housing market, Swanson says. He says the interest rates on about 60 percent of subprime loans will reset in the next two years…from 5 or 6 percent to 8 or 9 percent. He says a half-point cut in short-term interest rates won’t help those borrowers.

In New York, I’m Amy Scott for Marketplace.

RYSSDAL: There are some trickle down economics out of today’s rate cut. And they all happened pretty quickly, as in just minutes after the Fed made its announcement. Banks cut what’s called the prime rate — that’s the one that’ll eventually trickle down to you and me and our car loans and our credit cards. It’s at 7.75 percent at the moment. Also, the dollar tumbled pretty much right away. Down to an all-time low against the Euro — $1.40 or so. Which means imports will be getting more expensive.

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