David Brancaccio: For the first time since 2008, China has cut its key interest rate. It will drop by a quarter of a percent in an effort to spur an economy was galloping and is now down to a trot. In the U.S. a trot would be nice. Federal Reserve Chairman Ben Bernanke is on Capital Hill now, as market players watch for signs he might be thinking of something of his own to shake more life into growth and jobs here. Bernanke wasn’t ruling out action but if you listen to what he said, there’s nothing that seems imminent.
Ben Bernanke: As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.
Brancaccio: Marketplace’s David Gura joins us live now from Washington. David, good moring.
David Gura: Good morning.
Brancaccio: Ok, so what options, what’s in the tool box that Bernanke has?
Gura: Well, the biggest tool he’s got left in his toolbox, you mentioned David, is one the Fed has used a couple of times now: It’s called “Quantitative Easing.”
And I’ll let economist Kevin Jacques explain how that works.
Kevin Jacques: They’re buying up financial assets with the idea of injecting some level of money into the economy.
Gura: So buying bonds, buying and selling securities. The Fed wants to try and get money moving, to get people borrowing and spending. And it does that by driving down interest rates. As I said, the Federal Reserve has done this before, done quantitative easing before. And many investors hope the Fed will decide to do it again. Or something like it. But here’s the thing: Interest rates are already really low already, David. In fact, they’re at record lows.
Brancaccio: Yeah, I’m just looking as you’re talking, 1.63 percent is the yield on the 10-year treasury at this very moment. Interest rates are something people are really focusing on. As I said, China cut its interest rates today for the first time in about four years. Why all this focus on interest rates?
Gura: Federal Reserve interest rates determine how banks charge interest this is all about borrowing money, David. The theory is that when rates are low we’ll be more likely to borrow money. And economists I talked to said rates right now are already so low they’re “absolutely stunning.” So, is there a chance rates could go even lower? Yeah, they’re not at zero yet. We may hear something vaguely indicating this may happen today, from Ben Bernanke, but the Fed has a meeting here, in Washington, in just a couple of weeks, and that’s when they could make an actual decision.
Brancaccio: And we are about to hear in just a couple of minutes, low interest rates are not everyone’s cup of tea. For a retiree on fixed-income, sometimes low interest rates can be a problem. David Gura, thank you very much.
Gura: Thank you.
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