'Marketplace' Report: Interest Rate Cuts
JAMES HATTORI, host:
From NPR News, it's DAY TO DAY.
All financial eyes are on the Federal Reserve today. The board is meeting and expected to lower short-term interest rates to help the economy.
Joining us is John Dimsdale from MARKETPLACE.
John, exactly how much of a cut are people expecting from the Fed today?
JOHN DIMSDALE: Well, that's really the only question. It seems to be a quarter percent is baked into what Wall Street is expecting. This would be the third cut since the economy began struggling with bad home loans and tighter credit last summer.
Fed members have been signaling in their speeches and testimony that they are worried about signs of a slowdown in the economy and that they'll want to loosen the supply of money to avoid a recession.
Lower short-term interest rates eventually make borrowing cheaper and should ease up on credit card and mortgage interest rates as well.
HATTORI: Now, a bigger rate cut usually makes the stock market happy. But is there any risk to cutting interest rates that much?
DIMSDALE: Yeah, absolutely. The number one concern is inflation, and the Fed is especially sensitive to that now because these very high energy prices are already putting pressure on inflation.
Another problem is the value of the dollar. Lower interest rates make U.S. investments less attractive, sending global investors elsewhere. The dollar is already weak.
The other problem is that this rate cut could be interpreted as merely a helping hand for a few big banks that made bad loans and should have to pay for their mistakes.
Here is William Dunkelberg, who is the chief economist for the National Federation of Independent Business.
Mr. WILLIAM DUNKELBERG: I think there is a very good case that could be made for this being just to bail out again for the large financial institutions. And savers, of course, will really take it on the chin here, especially if the government freezes interest rates.
Every dollar that a debtor saves comes out of the pocket of a saver who lent them the money in the first place. So it's not a good picture for savers these days.
HATTORI: So is this likely to be the last rate cut for a while? That's the big question, huh?
DIMSDALE: Yeah. We'll have to read what guidance the Fed issues with their rate decision - perhaps another cut won't be necessary.
Some economists say they are seeing the bottom of the falling economy. They point to the decisions by several big foreign funds to step in with some multi-billion dollar investments to prop up banks that have been hurting from the subprime mortgage collapse.
Wall Street's been very pleased to see some big sovereign funds in Abu Dhabi and Singapore pour money into banks like Citigroup and UBS. Wall Street's thinking here is that these overseas investors see real value in these banks, despite their losses. Of course it could be that these funds are just so flush with cash, the cash that they've been earning from high oil prices, that they're making some risky gambles on the future of these banks.
Most economists say lenders in this country will be adjusting to the bad home loans for many years as this housing crisis sorts itself out.
HATTORI: Something to look forward to.
John Dimsdale of Public Radio's daily business show MARKETPLACE. Thanks, John.
MARKETPLACE is produced by American Public Media.