Fed Mulls Strategies To Resuscitate Economy

The Federal Reserve meets Wednesday to ponder the deteriorating U.S. economy and what, if anything, it can do to help. David Wessel of The Wall Street Journal talks with Linda Wertheimer about what the Fed may be considering.

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The Federal Reserve is meeting today to ponder the deteriorating U.S. economy and what, if anything, it can do to help out. To find out what they may be considering, we turn to David Wessel. He's the economics editor of the Wall Street Journal and a frequent guest on our program. Good morning, David.

Mr. DAVID WESSEL (Economics Editor, The Wall Street Journal): Good morning.

WERTHEIMER: Now, later this week, the government is going to reveal just how bad it is, or at least how bad it was in the last three months of 2008. We're talking about the upcoming report on the Gross Domestic Product, which is presumably one of the biggest economic indicators we have. What do you think it's going to say?

Mr. WESSEL: Well, analysts are expecting that on Friday, the government will report that the economy contracted at a five percent annual rate in the fourth quarter. That comes after a small decline in the third quarter, and what's expected to be another big decline in the current quarter.

WERTHEIMER: Explain the disastrous figure, the five percent, contracts at the rate of - what does that mean?

Mr. WESSEL: What it means is that, if you look at how much the economy shrank between the third quarter and the fourth quarter, and you come up with a number, then what the government does is say, if that rate of decline continued for a whole year, the GDP would be 5 percent smaller. The country produces about $3.5 trillion of goods and services every quarter, and what this decline means is that in the fourth quarter, the economy produced roughly $40 billion less stuff than it did the quarter before.

WERTHEIMER: Are there any encouraging signs out there?

Mr. WESSEL: Well, there are not very many, but there are some. You know, one of the early developments in this recession was the collapse of the housing industry, and people have been waiting to see when will house prices stop falling. One favorable sign is that the inventory of unsold houses has fallen now for five months in a row, and that's kind of a precondition for house prices to stop falling, and is one of the few bright spots we see in the recent numbers.

WERTHEIMER: But does it mean that people are buying those houses, or that those houses are moving off the market because people are deciding they just simply can't sell them?

Mr. WESSEL: It means both. Clearly, some people are pulling houses off the market, but in some parts of the country, house prices have fallen so low, or foreclosed houses are being offered at such low rates, and mortgage rates have come down a little bit, that there are some signs that people are beginning to put their toe in the water and start buying houses.

WERTHEIMER: The Fed has already cut interest rates to zero. What more can they possibly do?

Mr. WESSEL: The Fed already has begun to bypass the banks and lend directly to securities markets and indirectly to make loans. It is, for instance, buying mortgage-backed securities, which is an indirect way of making mortgages, and it's about to do the same with auto loans and student loans. And one of the things on the table is to buy more long-term Treasury bonds as a way to lower those interest rates, which are very important to the economy. Their statement this afternoon will probably talk some more about that, provide a few more specifics than they did six weeks ago when they first announced this new strategy.

WERTHEIMER: Can you see their tracks anywhere? Is it doing any good?

Mr. WESSEL: Yes. You can see that mortgage rates started to come down as soon as the Fed said last year that it was going to put up to $500 billion of its money into buying mortgages on the market. They haven't spent very much of that money, maybe 10 percent of it, but mortgage rates have already started to come down, and that's one of the few signs of good news that's helping the housing industry.

WERTHEIMER: David Wessel is economics editor of the Wall Street Journal and a regular guest on Morning Edition. Thank you very much.

Mr. WESSEL: You're welcome, Linda.

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