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'Marketplace' Report: Another Rate Cut

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'Marketplace' Report: Another Rate Cut


'Marketplace' Report: Another Rate Cut

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From NPR News, it's DAY TO DAY.

Those Michigan foreclosure troubles are just a part of the gloomy economic picture. The Federal Reserve clearly hopes that lower interest rates can brighten things. The Fed is expected to cut rates again today.

Bob Moon is here from MARKETPLACE. Bob, we got an emergency three-quarter point cut last week. Now we're expecting this half-point cut today. This has got to be economic stimulus, isn't it?

BOB MOON: Well, it does, but it's kind of tricky as well for the Fed, Alex. If it was just a matter of nudging up the heat a little bit, that's certainly doable. But the economy is acting a bit like Goldilocks at the moment, and the Fed needs to worry about making things not too cold, not too hot, but just right. And if they guess wrong and the economy starts overheating, if they loosen up the credit market too much, for example, they run the risk of touching off another borrowing and spending binge, and that could end up having a pressure cooker effect on prices, which is another way of saying that inflation could boil over.

There are some economists who say that that surprise three-quarter percent interest rate cut that you referred to is enough. Stop right there. But investors who bet on future rate moves have been signaling that they want even more, they want as much as a half percent. There are other analysts who say if you split the difference at a quarter percent, that would be just right. And we're about to see what the Fed serves up now.

CHADWICK: Okay, good. Well, how about these new figures from the Commerce Department, gross domestic product? We had been talking about slowdown. Maybe people are worrying about stall-out.

MOON: Yeah, that's exactly the question here. This is the GDP number and the annual growth rate dipped to just six-tenths of a percent in the last quarter of last year. That's the worst pay since 2002. Not a huge surprise perhaps when you consider the deterioration that was going on in the housing market that you were referring to earlier. And of course credit was much harder to get. That made consumers and businesses more cautious in their spending.

CHADWICK: How about inflation concerns?

MOON: Yeah, that threatens to become really a bad flashback from the '70s here. You recall when we had what the experts called stagflation?


MOON: That's the dilemma that the Fed's facing right now. Just yesterday we had word from the Commerce Department that orders to factories for big ticket manufactured goods soared in December by their largest amount in five months. That was a surprisingly strong finish for what really had been a weak year for manufacturing. So the Fed's dealing with mixed signals here.

CHADWICK: Okay, well, however mixed they are, if there is an interest rate cut today, how long will it be before that might show up in mortgages or credit cards?

MOON: Well, that's - there is a little bit of a lag here. If the Fed cut let's say a half a percent, then that would mean a half a percent off the prime lending rate, and that affects certain credit cards, some home equity lines of credit, but not all of those mortgage resets. So you have to really check your paperwork on that.

CHADWICK: Thank you, Bob. Bob Moon of public radio's daily business show, MARKETPLACE.

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