Fed Expected To Cut Rates At Meeting The Federal Reserve is expected to cut interest rates Wednesday by at least a half-percentage point to 1 percent. Economists believe the Fed will cut rates because of the current financial turmoil and fears that there might be a prolonged recession.
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Fed Expected To Cut Rates At Meeting

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Fed Expected To Cut Rates At Meeting

Fed Expected To Cut Rates At Meeting

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It's Morning Edition from NPR News. Good morning, I'm Steve Inskeep.


And I'm Renee Montagne. There's an old saying about the weather in some places that may now apply to the stock market. If you don't like it, just wait a minute, and it will change. Yesterday, the Dow Jones average of big company stocks gained nearly 900 points.

INSKEEP: A huge gain, but don't mistake that for optimism about the economy. It may have more to do with expectations that the Federal Reserve will lower interest rates once again. The Fed is trying to counter an increasingly bleak economic outlook, and Fed officials are meeting today.

MONTAGNE: To talk more about this, we turn to David Wessel, as we often do. He's economics editor of The Wall Street Journal. Good morning, David.

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

MONTAGNE: So how low will they go?

Mr. WESSEL: Well, the Fed is expected to cut its key interest rate by at least a half a percentage point, which would bring it down to a very low 1 percentage point. This comes just three weeks after they cut half a point in coordination with the Europeans. And the markets are expecting they'll keep going later this year and cut them further, perhaps to half a percentage point.

MONTAGNE: Well, the Feds have been cutting rates, not just for these last weeks but even months. It doesn't seem to have helped.

Mr. WESSEL: Right. Well, what's happened is that they are trying to offset this incredibly tight credit crunch. And to the extent that they have cut rates, it's probably helped some. It just hasn't been enough to offset things. Now, another rate cut may not be a big help, but it would probably be worse for the economy if they didn't cut them at all. It does reduce the rates that, say, consumers pay on adjustable-rate loans. And it also reduces the rates that the Fed and the government is charging all these people who are borrowing from the government now under these unusual programs.

MONTAGNE: OK. But isn't one of the accusations often leveled at Alan Greenspan that when he was a Fed chair, he reduced rates so low, to 1 percent, and he kept them there so long that he created a housing bubble. I mean, so how is that different now?

Mr. WESSEL: Well, I think the Fed worries about that. The conventional wisdom inside the Fed now is, with the benefit of hindsight, they kept rates too low for too long during the Greenspan years. And that created this housing bubble, as you pointed out. And they'd like to avoid that again. But you don't want to fight the last war with the economy suffering so much. With so much at stake, they are doing the only thing they can do, which is administer this low-interest rate medicine. The challenge for them will be when this episode passes - and it will - how quickly they raise them again, because I think that was the big lesson that they drew from the Greenspan experiment.

MONTAGNE: David, it seems like I ask you this every time we speak, but how bad is the economy? What's the outlook for the near future?

Mr. WESSEL: Well, unfortunately, it seems to be getting worse. The government will tell us this week how bad the third quarter was, and economists are expecting them to say the economy contracted by perhaps seven-tenths of a percentage point. And the forecasts are that the economy will contract much more severely in the fourth quarter of this year and the first quarter of next year. And unemployment will go to 7 and a half percent or maybe 8 percent. And that this will be followed, when the recession ends, by a period of very slow and painful growth. Because what we are seeing now is the ripple effects of the credit crunch spreading out throughout the economy, and not just in the U.S. - where we see auto companies having trouble and high-tech companies reporting soft revenues - but now all over the world. So our export markets are going to be lousy as well.

MONTAGNE: And that bailout. I mean, when does that actually kick in?

Mr. WESSEL: Right. It seems like with all the medicine they've given, the patient should be getting better. One way to think of this is it's a little bit like having cancer and administering chemotherapy. They've put a lot of money into the economy, but the patient hasn't yet begun to respond. And of course, the Treasury still has lots of that $700 billion left to spend. So the medicine will not make the patient better until the banks feel healthier and begin to lend again, and we're clearly not there yet.

MONTAGNE: David Wessel is economics editor of The Wall Street Journal. Thanks for joining us.

Mr. WESSEL: You're welcome.

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