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Federal Reserve Trims Interest Rate Again

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Federal Reserve Trims Interest Rate Again

Economy

Federal Reserve Trims Interest Rate Again

Federal Reserve Trims Interest Rate Again

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The Federal Reserve cuts a key interest rate by a quarter-point amid signs the Fed is wrapping up a rate-cutting spree meant to keep the economy out of a crippling recession. But the Fed's future course will depend on inflation and the weakness of the dollar.

ROBERT SIEGEL, host:

This ALL THINGS CONSIDERED from NPR News. I'm Robert Siegel.

MELISSA BLOCK, host:

And I'm Melissa Block.

For all the gloomy news about the U.S. economy, numbers released today weren't as bad as predicted. The U.S. economy grew during the first three months of the year, but just barely; that's according to the Commerce Department.

The economy expanded at just six-tenth of the percentage point. And there were worrisome declines in consumer and business spending.

Hours after the report, the Federal Reserve cut interest rates by a quarter point, but the Fed also signaled that rate cuts may be over for now.

NPR's Jim Zarolli reports.

JIM ZAROLLI: The numbers today suggest that the U.S. economy still had a pulse in the first quarter, but you had to listen pretty hard to hear it. It produced more goods and services than the quarter before, but economist Lou Crandall of Wrightson ICAP says that was only because business inventories were growing.

Mr. LOU CRANDALL (Economist): That is, we had an increase in production because exports grew and inventories grew, we stockpiled goods. But actual final purchases in the American economy declined.

ZAROLLI: The reports said that businesses cut their spending on items like computer software and equipment, and consumers increased their spending by an anemic one percent, says economist Scott Anderson of Wells Fargo.

Mr. SCOTT ANDERSON (Economist): They're basing the head winds obviously of tighter credit conditions, dropping stock and home prices, high gasoline and oil prices, all coming to play in sort of a perfect storm.

ZAROLLI: Still, the numbers today were a bit better than expected, and they suggest that the economy hasn't yet entered a recession. Lynn Reaser is chief economist at Bank of America's Investment Strategies Group.

Ms. REASER (Economist): The GDP report shows that the economy is soft, it is weak, businesses and consumers are cautious, but it does not show an economy collapsing.

ZAROLLI: Reaser says one area of strength for the economy is the fact that exports are rising. The dollar has dropped against the major world currencies, so Americans are buying less from overseas and selling more abroad.

Ms. REASER: Of course our farm goods are in demand, but they're buying consumer goods, capital goods, and even our service sector is very competitive. So we have, for instance, architectural firms who can now compete against German firms very well in various areas of the world.

Mr. NIGEL GAULT (Economist, Global Insight): For years, U.S. spending growth had been faster than U.S. production growth, because we've been importing a lot, and not exporting very much.

ZAROLLI: Economist Nigel Gault of Global Insight says the growth in exports suggests that for the first time in a long time the U.S. production rate is growing faster than its rate of consumption.

Mr. GAULT: Because more of our production is going to exports or to substitute for imports that it did in the past.

ZAROLLI: So is that a good thing?

Mr. GAULT: I think it's a necessary thing. Yes, it's a healthy thing. We've been spending too much.

ZAROLLI: Still, Gault says that in the short-term there's still a real chance the U.S. economy will contract in the months to come. That presents some challenges for the Federal Reserve.

Hours after the report, Fed policymakers announced their sixth interest rate cut since last September. In the statement, the Fed said that weak housing conditions, stresses in the financial markets, and rising unemployment will weigh on growth over the next few months.

Again, Lynn Reaser.

Ms. REASER: They believe that they have done a great deal to help the economy, but they want to give us another insurance policy to get to a better growth track.

ZAROLLI: But the Fed statement also said that some indicators of inflation have risen. And Reaser noted that there was no reference to downside risks in the economy, something that's been in other recent statements. In Fed-speak, that means the Fed may be shifting its priorities.

Ms. REASER: Federal Reserve is now, perhaps, becoming almost as equally concerned about inflation as to economic growth.

ZAROLLI: And that suggests that Fed officials may be ready to take a pause and see how much good the recent rate cuts have done before cutting rates again.

Jim Zarroli, NPR News, New York.

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Fed Cuts a Key Rate in Bid to Lift Economy

What the Fed Said

• Economic activity remains weak.

• Household and business spending has been subdued.

• Labor markets have softened further.

• Financial markets remain under considerable stress.

• Tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

• Some indicators of inflation expectations have risen in recent months, but Fed policymakers expect inflation to moderate in coming quarters.

• Uncertainty about the inflation outlook remains high and it will be necessary to continue to monitor inflation developments carefully.

• Rate cuts so far, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity.

• The Fed will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

 

Source: Federal Reserve Board statement, April 30, 2008

The Federal Reserve has cut a key interest rate by a quarter of a percentage point, seeking to stem the flow of bad news surrounding the U.S. economy.

The action pushes the federal funds rate down to 2 percent. That's its lowest level since late 2004. It's the seventh consecutive rate cut by the central bank since it started easing credit conditions last September to deal with the growing threat of a recession.

Analysts say the cut may be the last made by the Fed for some time.

In a statement accompanying the cut, the Federal Reserve Committee said that it "expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices" and lowered pressure on resources.

But the panel also stated that "uncertainty about the inflation outlook remains high" and that it will monitor the economy closely for signs of rising inflation.

From NPR reports and The Associated Press.

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