Marketplace Report: Global Stock Market Downturn The world's stock markets have fallen sharply in recent days. Experts believe rising interest rates and inflation worries have frightened investors around the globe. Some economists, however, believe this market drop signals global economic strength, rather than weakness. Madeleine Brand discusses the issue with John Dimsdale of Marketplace.
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Marketplace Report: Global Stock Market Downturn

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Marketplace Report: Global Stock Market Downturn

Marketplace Report: Global Stock Market Downturn

Marketplace Report: Global Stock Market Downturn

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The world's stock markets have fallen sharply in recent days. Experts believe rising interest rates and inflation worries have frightened investors around the globe. Some economists, however, believe this market drop signals global economic strength, rather than weakness. Madeleine Brand discusses the issue with John Dimsdale of Marketplace.

MADELEINE BRAND, Host:

Back now with DAY TO DAY, I'm Madeleine Brand. Stock markets around the world rebounded a bit today, a welcome respite after the previous week. That's when the Dow Jones Industrial Average lost five percent of its value. It's now at a four month low. Worldwide markets are also down, in some countries, by more than 20 percent. Joining us from MARKETPLACE is John Dimsdale, and John, I thought we were just talking a month ago about markets hitting new highs. What happened?

JOHN DIMSDALE reporting:

That's right. Back in April and May, the stocks were almost getting back to the record levels they reached before the bubble burst in the late 90s. But there's been a big retreat just in the last few weeks, mostly on fears of inflation.

Anybody who's been to the store recently, knows that prices have been going up. This morning, the Labor Department reported that the consumer price index for May jumped more than expected, even when you take out energy prices. So it's more than just gasoline.

BRAND: So the markets don't like that, what about the Fed? Does that mean it might take action and raise interest rates?

DIMSDALE: Probably, they meet at the end of this month and the consensus is now that they're going to raise rates another notch. And that raises another fear for stock traders. They wonder, could the Fed go too far and hurt the economy. You know, the world economy's been benefiting the last three years, or so, from easy money, low interest rates which encouraged borrowing for investments. As a consequence, global growth has been running at a good, strong four and a half percent. This period of easy money is coming to an end. Central bankers are raising interest rates to keep the economy from overheating, and that's especially true here in the U.S.

Mark Zandi at Moody's Economy.com notes that the Fed has been gradually but steadily tightening their grip on interest rates and he expects one more notch on June 29th.

Mr. MARK ZANDI (Moody's Economy.com): If they push much beyond that, they run the risk of overdoing it, pushing the economy to an environment of much slower growth or creating some kind of financial event, which is historically, something that has occurred at this point in the business cycle.

DIMSDALE: That financial event that he and others are worried about is a recession. In the traditional business cycle after several years of a good economy, we're due for a slow down.

BRAND: John, President Bush at his news conference today said the economy is strong. There's good productivity, low unemployment, why is his assessment so different from the stock market's?

DIMSDALE: Well, he is right. The American economy has been growing strongly this year. Republicans being the party in power want some credit for that. And they're privately upset with Fed Chairman Ben Bernanke for being so vocal about his inflation fears. The GOP is worried that the Fed's going to put the squeeze on the economy just as voters head to the polls in November. So President Bush wants to accentuate the positive.

Coming up on MARKETPLACE, we're talking to builders along the Gulf Coast about how they're preparing for hurricane season.

BRAND: Thank you John. John Dimsdale of Public Radio's daily business show, MARKETPLACE. It's produced by American Public Media.

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