RENEE MONTAGNE, host:
This is MORNING EDITION from NPR News. I'm Renee Montagne.
The clouds over the economy are darkening. Last night, the chairman of the Federal Reserve, Ben Bernanke, warned that financial conditions are getting tighter and Americans could start to feel the strain.
Mr. BEN BERNANKE (Chairman, Federal Reserve): I expect household income and spending to continue to grow. But the combination of higher gas prices, the weak housing market, tighter credit conditions and declines in stock prices seemed likely to create some headwinds for the consumer in the months ahead.
MONTAGNE: Fed chair Ben Bernanke. To talk us through what could be grim times ahead, we're joined now by the Wall Street Journal's economics editor David Wessel. Good morning.
Mr. DAVID WESSEL (Economics Editor, Wall Street Journal): Good morning, Renee.
MONTAGNE: Why is the economy slowing so much now? He mentioned many conditions - break that down for us.
Mr. WESSEL: Well, all the things that Mr. Bernanke mentioned are contributing to the slowdown in the current quarter. On top of that, business built a lot of inventories in the third quarter of stuff that they don't anticipate being able to sell, so they may cut production in the current quarter. But most importantly, the whole credit system, which provides the fuel to the American economy, seems to be constricting. And that's what Mr. Bernanke is most worried about.
MONTAGNE: Well, the inevitable question then, when economic conditions aren't looking so good, we have the chairman of the Fed admitting it, is the Fed likely to cut interest rates again when it meets next month?
Mr. WESSEL: Oh, I think so. Mr. Bernanke in the day before the vice chairman of the Fed Donald Kohn basically held up signs with big arrows pointing down. The only question now is whether the Federal Reserve on this 11th of December when they meet will cut interest rates by a quarter point or whether they're worried enough to cut them by a full half percent of point.
MONTAGNE: Although despite these mixed economic readings, the stock market has rallied for this last three days. Why is that?
Mr. WESSEL: Go figure. I have a hard enough time figuring out the economy. I just can't figure out the stock market sometimes. What people are saying is the combination of, A, this big investment that Abu Dhabi made in Citigroup gave some confidence to people that the banking system was getting a rescue. Oil prices are coming down, and that's a good thing. And then the notion that the Federal Reserve is rushing to the rescue with interest rates cuts seemed to have cured stock market investors who, just a few days ago, were in the dumps.
MONTAGNE: And will that turbulence in the markets put a strain on the larger economy?
Mr. WESSEL: It definitely has an impact. I think it must be hard for people to understand how the stock market can be down 10 percent and up 10 percent, feeling a little whipsawed. I think the most important thing going on in the financial markets though, as I said earlier, is whether credit - people who want to buy a house, credit cards, auto loans, businesses that want to expand -begins to loosen up again or whether there's so much uncertainty and fear that people who lend just get a little more cautious all at once.
MONTAGNE: Now, you just mentioned the Abu Dhabi. And of course, earlier this week, Abu Dhabi, part of the United Arab Emirates, had bought the single largest stake in the biggest bank in the U.S., seven and a half billion dollars into Citigroup turning - but what about that, Citigroup turning to a foreign government's fund to bail it out after billions of dollars of its own losses.
Mr. WESSEL: Well, what's going on now is that a number of large financial institutions that thought that they were protected from big defaults in the subprime mortgage industry and so forth are discovering that they weren't protected. And they're taking big hits. As you pointed out, Citigroup is one of the ones who's taken a big loss. As a result, their capital base - that money they hold for emergencies - has eroded and they're desperate to raise capital. Citigroup turned to Abu Dhabi.
Freddie Mac, the big mortgage lender, has done a preferred stock issue. All these companies are trying to build up their capital foundations, which is important if they're going to be continuing to lend to the U.S. economy. And I think one of the things that cheered the stock market was it gave a sense that there was a little bit of a light at the end of this dark tunnel. We're not -it's - we're not at the end of the tunnel, but this was a good sign. The question, of course, is Abu Dhabi smart or are they just getting in as the slide continues downward?
MONTAGNE: David, thanks very much.
Mr. WESSEL: A pleasure.
MONTAGNE: David Wessel is economics editor at the Wall Street Journal, and he also joins us here on MORNING EDITION.
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