Fed Cuts Key Interest Rate
MADELEINE BRAND, host:
From the studios of NPR West, this is DAY TO DAY. I'm Madeleine Brand.
JAMES HATTORI, host:
And I'm James Hattori.
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BRAND: First though, it's been a particularly crazy week on Wall Street and in markets around the world. And today is offering even more drama. Overnight, Asian markets fell dramatically. Japan had its worst one-day loss in years. When European markets opened, they started heading south. Then to pretty much everyone's surprise this morning, the Federal Reserve announced a cut in a key interest rate. That made markets all over the world very happy.
NPR's Adam Davidson has been tracking all of this and he joins us now from New York. Adam, traders in New York, very, very happy today?
ADAM DAVIDSON: Yes, certainly. The Dow is up. Everyone thought it was going to go way down. And it went up because of what the Fed did.
BRAND: So they cut this rate, why?
DAVIDSON: Well, first of all, let me just say, they did not cut that Fed funds rate, which is what people think of when they say, oh, the Fed raised rates or it lowered rate. That's a different rate. What they cut is called the discount rate. It's sort of a standing offer to certain qualified banks to - that they can borrow money at a certain rate if they're in a lot of trouble. It's kind of esoteric.
But basically it's a psychological move. It's letting banks and everyone else in the market know we know there's a problem, we're prepared for the problem, we're ready to give money where money is needed at a cheaper rate than it used to be. So it's a psychological reassurance.
BRAND: And so that's all the markets around the world needed was that little psychological boost to respond so dramatically?
DAVIDSON: At least this morning. We'll see how long it lasts. But you know, yesterday was a really crazy day. The day before was pretty bad too; markets falling, markets rising, lots of volatility. It's all rooted - it's not that all these people know something that you and I don't happen to know. It's that nobody knows what's going on. We know that there's a problem, that certain banks have a problem with subprime mortgages, that they invested too heavily in all these mortgages to Americans with bad credit, and that a lot of those mortgages are defaulting and so these banks are seeing some of their assets freeze.
That's not the problem. The problem is we don't know how many other banks, how many other companies, how many other hedge funds and pension funds are also invested. So there's sort of this ticking time bomb mysterious thing out there. And investors hate mystery like that. They don't like having no idea how to assess the risks of the markets. So they respond very rapidly to lots of little rumors and just gut panicky feelings. So some reassurance seems to help quell that fear.
BRAND: Well, does this mean, Adam, then the Fed won't cut the other rate - its benchmark rate, the Federal funds rate?
DAVIDSON: Pretty much everyone today was writing about it saying, no, they're definitely going to have to cut that benchmark rate, that key rate that we think of, you know, the rate that our credit cards are tied into, the adjustable mortgages are tied into, the rate that really changes all of our lives. The Fed doesn't want to. There's a lot of risk in doing that.
In fact, there is an argument that a lot of people are saying that the whole crisis right now is caused by the fact that Alan Greenspan back in 1998, when there was a very similar financial crisis, lowered interest rates and created this feeling among investors that, hey, no matter how bad things get, the Fed's always going to come in and bail us out, they'll always save the day, and that that created an environment that encouraged banks and others to lend these subprime mortgages, to lend to people who they probably shouldn't have been lending to.
So there's a fear that if the Fed does that again now, which frankly, they probably will, it'll short term be a benefit, but long term could just reinforce some really bad behavior.
BRAND: Okay. What I don't understand is that - you mentioned this earlier, this all started because of high credit risk, Americans beginning to default on their subprime loans. How does that spread into a crisis around the world?
DAVIDSON: Well, here's what we don't know. We don't know if the subprime mortgage problem in the U.S. is a symptom or a cause. But either way, what we - it seems that credit is shrinking from world markets. Meaning anybody anywhere in the world who needs money is having a harder time getting money. So that means more companies are going to go bankrupt, even entire countries could start defaulting. It's a scary situation.
BRAND: Okay. We will be following it here at NPR.
NPR's international business correspondent Adam Davidson, thank you very much.
DAVIDSON: Thank you.
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