Fed Keeps Key Interest Rate Unchanged
ROBERT SIEGEL, host:
From NPR News, this is All Things Considered. I'm Robert Siegel.
MICHELE NORRIS, host:
And I am Michele Norris. In Washington and New York today, members of the Federal Reserve debated how to respond to Wall Street's struggles. In New York, the Fed was in talks over the future of AIG, a firm with massive global reach. In Washington, the question was whether a cut in interest rates could help the situation. In the end, the Fed decided to keep the rates where they are. NPR's John Ydstie has our story.
JOHN YDSTIE: A note at the bottom of the Open Market Committee's press release on interest rates today told the story. It said, "Miss Cummings voted as the alternate for Timothy F. Geithner." That's because Mr. Geithner, president of the New York Fed, was tied up in New York trying to find a way to save AIG.
Just yesterday, Treasury Secretary Henry Paulson insisted those meetings were aimed at trying to find a private-sector solution. Any hope of that seemed to evaporate this morning, when the investment bank Goldman Sachs declined to provide aid. By late afternoon, there were reports in the financial press that the Federal Reserve was considering providing loans to the firm. Bloomberg News called it a course reversal by the government. But economist Sung Won Sohn, a professor at Cal State University, disagrees.
Professor SUNG WON SOHN (Economics, California State University): Secretary Paulson has really drawn a line in the sand. And I think, you know, that line stands, and if they do decide to give a bridge loan to AIG, I don't think, you know, that the line would be breached.
YDSTIE: Sohn says the loan would likely be comparable to a short-term Fed loan to a commercial or investment bank and would require AIG to put up assets as collateral, so there would be only modest risk for taxpayers. AIG needs about 75 billion dollars to shore up its books. At its meeting in Washington, the Federal Reserve's Open Market Committee disappointed many Wall Street traders when it decided to hold its benchmark interest rates steady at two percent. Traders on the floor of the New York Stock Exchange openly booed and hooted as the news arrived at mid-afternoon. Nevertheless, stock surged after the report, and the Dow Industrials closed up 141 points.
The Fed acknowledged in its statement that there were increased strains in financial markets and suggested risks to growth and the risk to inflation were both concerns. Professor Sung Won Sohn says holding rates steady was the right decision.
Prof. SOHN: Lower interest rates at this time would not really solve any problems in the financial markets.
YDSTIE: That's because the problem in the financial markets is liquidity, keeping enough money in the system for financial companies to continue operating. The Fed has arranged a number of loan programs since the failure of Bear Stearns in March to help out, and those have been quite successful at increasing liquidity, says Sohn.
Prof. SOHN: It has pumped in over 70 billion dollars in conjunction with European Central Bank and the Bank of England, for example, today.
YDSTIE: Sohn also suggests that, by holding a steady interest rate course in the midst of the financial storm, the Fed is signaling that it's not panicking. The vote today was unanimous, another calming signal in a committee that often disagrees about the direction of interest rates.
While the Fed meetings were in the forefront today, appearances by Treasury Secretary Paulson were being canceled. He'd been scheduled to appear before a Senate committee to testify on the Fannie Mae-Freddie Mac bailout. That hearing was postponed. He was also scheduled to speak on the housing crisis at a think tank. An undersecretary showed up in his place.
In addition, a news conference, scheduled after a meeting between President Bush and his chief financial market advisers this afternoon, including Paulson, was canceled. Spokesman Tony Fratto said the White House decided it would be best to limit public comment about the markets at this time. John Ydstie, NPR News, Washington.
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