Cheaper Money Made Possible by the Fed
ALISON STEWART, host:
Okay. We've seen this headline. As expected, yesterday, the Federal Reserve cut key interest rates by a quarter percentage point.
LUKE BURBANK, host:
STEWART: How much do you care?
STEWART: What if I told you it's the lowest rate in almost two years, now 4.25 percent. Still don't care? What if I told you the Dow dropped almost 300 points after the news and stocks suffered the worst one-day drop in more than a month? Crickets?
All right, well, just give us the next three minutes and we'll see if we can change that. It is time for another edition of the BPP's Make Me Care.
Up to the task is Mike Santoli, the associate editor of Barron's Weekly.
Mr. MIKE SANTOLI (Associate Editor, Barron's Weekly): Hello.
STEWART: All right. So before we get to this whole she-bang, remind people exactly what interest rate was cut so we're all on the same playing field here.
Mr. SANTOLI: Sure. It's called the Federal Funds Rate. It's really the only rate that the Federal Reserve directly controls and what it is, is the rate that banks charge one another for overnight loans. Basically, banks are always kind of shuffling money between themselves and this is the most direct way that the Fed can try and control general interest rates.
STEWART: All right. So everybody, keep that in your brain.
Mike, your time has come. Jacob, our director, please prepare the timer for 60 seconds. Mike, here are the rules: you have one minute. When you hear the buzzer, your time is over. Go ahead and finish your sentence because we're polite here at NPR.
Barron Weekly, Mike Santoli, yesterday, the Fed cut the interest rate another quarter point, make me care. Go.
Mr. SANTOLI: You should care because the Fed is essentially controlling the cost of money across the economy. If you have a credit card loan, if you have a mortgage, if you want to get any of those things, chances are this is going to directly impact that, so it might be a little bit of relief on the borrowing side. More broadly, the Fed is trying to unclog a seized up credit market right now. If banks don't want to make loans for mortgages, whether they're risky ones or not, they've been burned by the subprime mortgage crisis. They don't want to make loans to companies that are even slightly risky. And the Fed is trying to ward off the possibility of a recession that this credit crunch and the broader housing crunch might bring about.
So if you want a job, you have job, you're looking for a better job, the Fed is trying to keep the economy growing and to try to prevent a recession, which many are now predicting for early next year. That's why you should care. It is essentially a pocketbook issue, not just really a Wall Street-centric issue, and the fact that Wall Street was a little bit cranky about the degree of help the Fed was giving them, probably means the Fed is going to start giving more help, therefore, more relief on interest rates.
Hopefully, it can kind of nurse the whole credit and housing system through so we can continue to have at least a decent economy here.
STEWART: Nicely done.
BURBANK: Oh, Mike, like you have gills? I mean, you didn't even breathe. I mean you must be like the world's diving champion.
Mr. SANTOLI: Breathing is overrated.
(Soundbite of laughter)
BURBANK: Make Me Care about breathing with Mike Santoli.
STEWART: So, Mike, let me follow up in a couple of things.
Mr. SANTOLI: Yeah.
STEWART: Now that people are involved and vested and they know it's a pocketbook issue as well, this cut was expected. Did it go far enough to take care of my pocketbook?
Mr. SANTOLI: You know, that's what the market is suggesting. Probably not because that was expected but there was a faction that expected a half point. Basically, they wanted the Fed to make a gesture that say we really feel your pain. We're really going to help you that much more. We're going to have a sense of urgency about it. So it's not going to in itself help, but it will incrementally encourage banks to keep lending and hopefully keep the gears moving in the economy.
STEWART: All right. So this is the last big move by the Fed on '07, right? This is the big - this is it?
Mr. SANTOLI: This is the last meeting that they have scheduled.
Mr. SANTOLI: They have in the past, on occasion, kind of between meetings. It had sort of an emergency rate action. Some people are thinking something like that could happen but most likely it's the last official action for the year.
STEWART: All right. So - considering this is likely the last official action of the year, can you give us a snap shot of the year? Is it - was it a good idea to refinance my credit card? Should I just sit still?
Mr. SANTOLI: It has been a good idea to the extent that they are - that those offers are available. I would say if those - if the attractive offers for, you know, getting a lower transferring balance or stuff are available to you and it genuinely seems like it's a better deal, it is good to jump on it simply because I don't necessarily see those types of rates crashing that much farther in the very near future.
BURBANK: And Mike, can I just hijack this segment for a quick moment…
Mr. SANTOLI: Yep.
BURBANK: …and kind of deviate because I've been trying to get answers out of people here on the staff and they're not knowledgeable enough. You might know about this. I'm moving back to Seattle. I'm going to buy a house there at some point. But I'm just trying to figure out, economically, in terms of rates moving and things going here and there and some of this stuff with interest rates, is there some, like - I think - should I circle a date on the calendar, like, next spring that's like the day when things are going to - like, the bottom is going to drop out or it's going to be better for me?
Mr. SANTOLI: Yeah. If only that were possible. I do think that, while you've already seen especially areas like Seattle on the coast, where prices have already come down on average, maybe 15 - 10, 15 percent from the top, the housing market takes a long time to adjust. It's not like the stock market where one day it's just going to rocket higher. So there is going to be this period where probably prices are going to stay a little bit sluggish and that's probably good - it's a buyer's market.
The one thing I would say is, mortgage rates are now, for 30 or fixed mortgages, somewhere around six percent. That's historically pretty low. And treat the house as some place to live that you can afford…
Mr. SANTOLI: …not an investment that's going to be flipped. Then I think everybody is going to be okay if they'll take that approach.
BURBANK: Thank you for indulging me. That's completely off topic but I've been dying to find out.
STEWART: No problem. I've got one more question. I just want to dive into something that you said during your Make Me Care segment. You said this is about warding off a recession?
Mr. SANTOLI: Yeah.
STEWART: Should we really be concerned about this?
Mr. SANTOLI: Yeah. There's certainly about I would say something close to a 50-50 probability, at least amongst, you know, certain indicators that we might - that we're at risk of recession. Now keep in mind a recession is simply two quarters in a row when the economy shrinks a little bit, doesn't grow. And nobody is really predicting a deep, nasty recession. But the consumer right now is a little bit stressed with debt and gasoline prices and things like that and that is creating this possibility that we could be in for a recession.
A recession is not necessarily a disastrous thing. It just means the economy kind of stalls and maybe job growth reverses a little bit, which is obviously not so positive.
STEWART: Mike Santoli is the associate editor of Barron's Weekly. A tremendous job making us care, Mike.
Mr. SANTOLI: Thank you very much.
BURBANK: Mike, thank you.
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