The Fed Steps in, Calming Wall Street's Worries

The United States Federal Reserve surprised many on Friday when it cut the rate it charges commercial banks when it lends them money. The move was aimed at restoring investor's confidence in the world's credit markets. And it seemed to have the desired effect. Stock prices soared in both the United States and Europe.

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SCOTT SIMON, host:

This is WEEKEND EDITION from NPR News. I'm Scott Simon.

The Federal Reserve doesn't often surprise people, it's not while they're in business. But the Fed surprised many on Friday when it cut the rate it charges commercial banks when it lends the money. The move was aimed at restoring investors' confidence in the world's credit markets. And it seemed to have the desired effect. Stock prices soared, both in the United States and Europe.

NPR's Jim Zarroli joins us from New York. Jim, thanks for being with us.

JIM ZARROLI: Hi, Scott.

SIMON: And help us understand why the reduction in the discount rate was good for the stock prices.

ZARROLI: Well, you know, so much of what's going on in the markets right now is just so deeply emotional. Sometimes you can pinpoint what causes stocks to go up or down, but there's just so much sheer drama going on right now. It gets a lot trickier. Yeah, I think people like the idea that the Fed is kind of riding to the rescue.

It isn't necessarily that they cut the discount rate because the discount rate is not all that important. The discount rate is the interest rate that a bank has to pay when it wants to borrow money. But most banks don't borrow money from the Fed.

But what was probably more important yesterday was a statement that the Fed issued. The statement said something like downside risks to the economy haven't increased appreciably, which is Fed speak for, we're going to come in here and step in and do what we can to address this problem.

SIMON: And why do you think they waited until Friday to act?

ZARROLI: They acted now because they really couldn't wait any longer. This problem is not going away. We hear all the time about more hedge funds and mortgage companies in trouble. This week, it was the biggest mortgage lender in the United States, Countrywide Financial. It said it can't raise the capital that it needs to borrow. Every time something like this happens, people say, you know, what's next?

It's really the open-ended nature of this crisis that is the problem. And that really, over time, just tends to erode people's confidence in the economy. Nobody wants to invest. People can't get mortgages. Businesses can't borrow. And pretty soon, you have a recession.

SIMON: There are some drawbacks to cut the interest rates, aren't there?

ZARROLI: Yes, there are some drawbacks and the Fed has been reluctant to get involved because of them. Despite all the problems that you're seeing right now, the U.S. economy is still doing really well - the growth rate is strong, unemployment is low.

And if you cut interest rates when the economy is doing well, you get a higher inflation. You know, there is also just a widespread view among a lot of people you talk to that this crisis happened because of a lot of reckless investment decisions that people made.

There were too many mortgages given to people who shouldn't have gotten them. Too many institutional investors who bought mortgage-backed securities that they shouldn't have bought.

And I think a lot of people would say, you know, the Federal Reserve steps in now. It basically protects people from the consequences of their stupid decisions. It rewards them.

On the other hand, at some point, this gets to be such a big problem. The Fed has to step in and right now, I think, they're trying to find the right balance, trying to decide when to do that.

SIMON: NPR's Jim Zarroli, thanks very much.

ZARROLI: You're welcome.

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