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Markets react to rate drop

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Scott Jagow: Now that we’ve gotten that out of our system, it’s time for a reality check. This drop in interest rates will not solve everyone’s problems. There are still many home foreclosures coming. The housing market will still be in a slump for a while. And other markets are not so thrilled with the Fed’s decision.

Let’s bring in our European correspondent, Stephen Beard. Stephen, what’s the downside here?

Stephen Beard: Currency markets have shown far more restraint. In fact, the dollar has extended yesterday’s decline. This morning in Europe, it was down to a 15-year low against other trading currencies. This reflects, of course, the fact that international investors are gonna get a lower return on their short-term dollar deposits now. But also, I mean, traders here are saying there is another concern that’s being reflected in the weakening dollar, and that is that the Fed may be taking much too much of a risk with inflation.

Jagow: Hmm. Because we’re getting statistics here that suggest inflation isn’t a big threat. What are you referring to?

Beard: Well, it was not widely observed yesterday that the price of oil hit $82 a barrel, an all-time record. And the price of wheat in the futures market was also soaring. So there is the prospect of higher energy and food prices in the pipeline. So, you know, the inflation threat clearly hasn’t gone away.

Jagow: Well, on balance, when you talk about the markets’ reaction, what is your sense? I mean, what are analysts and investors saying over there about this decision by the Fed?

Beard: Well, I think they’re saying that of course, they appreciate the Fed has an extremely difficult decision to make. But there is danger, they say, that by cutting interest rates by 0.5 percent, he could encourage precisely the sorts of things that got us into this mess in the first place — excessive risk-taking and bad lending practices.

Jagow: Well, that doesn’t sound very good.

Beard: It certainly doesn’t.

Jagow: All right, Stephen Beard, our correspondent in London. Thank you.

Beard: OK, Scott.

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