Fed Orders Emergency Cut In Key Interest Rate

The Federal Reserve has taken yet another step in an effort to calm financial markets. It cut a key interest rate by a half percentage point to 1.5 percent. This comes a day after the Fed made huge amounts of credit available to corporations.

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STEVE INSKEEP, host:

The Federal Reserve has taken yet another step in an effort to calm financial markets. Chairman Ben Bernanke and his fellow Fed governors cut interest rates this morning. This comes a day after the Fed made huge amounts of credit available to corporations. British authorities have also made a major move to prop up their banking industry, and we'll have more on that in a moment. We begin with NPR's Jim Zarroli who's following the Fed's moves from New York. He's with us live. Jim, good morning.

JIM ZARROLI: Good morning, Steve.

INSKEEP: So, what's the Fed doing?

ZARROLI: Well, this just seems to be another kind of surprising move in a week when we've had a number of surprising moves. I mean, the Fed has basically said that it is cutting the Federal Funds Rate by half a percentage point. And this is being done in coordination with all the other central banks, European and I believe some Asian banks all getting together and doing this, which is something that a lot of economists have been calling for, for awhile. The Federal Reserve has issued a statement saying the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending. So, I think it's - they're basically saying, you know, this is necessary because we're likely to see further slowdown in the economy.

INSKEEP: Just so we understand what's going on here, the Fed - you said the Federal Funds Rate. Is that making it cheaper for banks to borrow money which in turn should make it more profitable for banks to lend money? Is that what's happening?

ZARROLI: Well, yeah, I think that's been the idea all along now. The Fed has cut rates a number of times in the past year, in the past 13 months really. And the idea has always been that it would, you know, make it cheaper to lend. That would get the economy going. It, so far, really hasn't worked out that way because there have been a number of other issues, specifically fears, a lot of banks afraid to lend, you know, basically that's it. Just that the credit crunch has cast a pall over everything, and just, you know, circumvented the effects of the rate cuts by the Federal Reserve.

INSKEEP: We're talking with NPR's Jim Zarroli about the Federal Reserves' decision to cut interest rates from two percent down to 1.5 percent. And, Jim, I understand this is the latest of several moves by the Fed. We did have this effort to get money to corporations yesterday, and also Ben Bernanke gave a much watched speech yesterday. Did the markets like what they heard?

ZARROLI: Well, this is one of these things that makes you realize what a strange time we're in. Bernanke sounded very alarmed about the economy. He said conditions aren't going to turn around until next year. And you really had him all but come out and signal the rate cut that he actually has now come out and announce this morning. Now, this kind of talk is ordinarily something that the markets like to hear. But this time, Bernanke spoke, and we just saw the stock markets fall further. Yesterday was a real bad day in the market.

INSKEEP: We're around 500 points down on the Dow.

ZARROLI: Yeah, and all of the major stock indexes were down more than five percent, and this comes after another big drop on Monday.

INSKEEP: So, given that there are stock market drops around the world, let me ask about the credit market which you said to be the heart of all of this, Jim Zarroli. Is there any sign that all the efforts to loosen up the credit markets - that all those efforts have had any effect?

ZARROLI: Well, this is one of the bright spots yesterday, you actually had a slight easing in credit, and the reason had something to with the facility, this entity that the Fed decided to set up in which it would buy commercial paper from companies. That's an important part of the credit market for companies and it has been really weak lately. And once the Fed did that, we saw slight easing in credit conditions. Now, of course, we'll see what effect today's coordinated rate cut by the central banks has.

INSKEEP: OK. Jim, thanks very much.

ZARROLI: You're welcome.

INSKEEP: That's NPR's Jim Zarroli again following the latest news that the Federal Reserve has cut interest rates once again.

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