Fed Cuts Interest Rate Further
ALEX CHADWICK, host:
From the studios of NPR West, it's Day to Day. I'm Alex Chadwick.
MADELEINE BRAND, host:
I'm Madeleine Brand. Coming up, a kitchen-table conversation about hard economic times.
CHADWICK: First, the Federal Reserve and European Central Banks have banded together to cut interest rates half a percent. This is a bold and a coordinated move to try to ease what it is fast becoming a global financial crisis.
BRAND: But that action did not calm the U.S. stock market this morning. It opened down sharply and has been bouncing around since.
CHADWICK: We go to NPR business reporter Frank Langfitt. Frank, what is the purpose of the interest rate cut, and why do it together, coordinated, everybody around the world going in?
FRANK LANGFITT: By cutting the interest rates, as you know, it's going to make money cheaper to borrow and hopefully, we'll get more lending and economic activity going again. But by doing it together, you level the playing field. I mean, one of the concerns is, let's say the U.S. did this on its own. Our interest rates go down. Well, money may flow to Europe, where they can get higher interest rates, and that's about the last thing the U.S. needs right now. We saw earlier, European governments acting on their own, and some of the moves they were making were actually hurting other European governments.
CHADWICK: So how common is it for something like this to happen around the world - all of these governments coordinating? Surely they're talking to each other about this global financial crisis but to see everybody acting in coordination - that's pretty unusual, isn't it?
LANGFITT: It is. I mean, it has happened before. And what they're trying to do is send a good psychological message that they take this seriously and they see it as a global problem. One of the challenges, though, is that the train is kind of down the tracks in terms of a recession. Most economists think we are in recession, and so what you saw on the stock market today is a lot of uncertainty. There's already a lot of pain in our economy. There's probably going to be a lot more, and an interest rate alone doesn't really stop that bleeding. It can take six months or more for that to work through the system. And the real core problem right now - as I think we've been hitting on a lot at NPR - is that it's the credit markets. Banks are afraid to lend to each other. They don't trust each other. And by just cutting the interest rates, you don't directly affect that.
CHADWICK: So the investors have not responded positively so far this week. Maybe it's this distrust of the credit markets. What can the governments do?
LANGFITT: Well, the Fed has already made another move on this. Again, sort of remarkable - it's now going to lend directly to companies in what's called the commercial paper market. And the commercial paper market is, simply, financial services firms lending money short term to other companies overnight or for a few months. And the idea is, you know, if you need to make payroll, pay for inventory, it's a huge market and everybody uses it. This has been drying up because there's a lot of distrust. And what the Fed is hoping to do here is to restore confidence and get more lending going on out there because that's really the great fear right now in our economy.
CHADWICK: The Fed is lending directly to companies?
LANGFITT: It's extraordinary.
CHADWICK: Tell me - here is the question, and I think this is what everybody in the markets wants to know, everybody really - what is going to happen next?
LANGFITT: Well, what you've seen in Europe, and you've seen in the United States now, is these governments throwing practically everything at the problem. It's extraordinarily aggressive. It's creative. But the sad part and the tough part is it's going to take time. And so really, in the next few weeks, a lot of people are expecting a lot more volatility.
CHADWICK: NPR business reporter Frank Langfitt. Frank, thank you.
LANGFITT: You're very welcome, Alex.
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