RENEE MONTAGNE, host:
This is MORNING EDITION from NPR News. I'm Renee Montagne.
STEVE INSKEEP, host:
And I'm Steve Inskeep.
This may be a moment when a Wall Street trader could look around and say it could be worse. The Dow Jones Industrial average is down, but not nearly as much as in early trading when it fell more than 400 points.
Two things happened before the start of trading. Asian markets dove for a second straight day. That raised fears of a stock market crash. But then the Federal Reserve acted dramatically. It cut one of the economy's most important interest rates, the federal funds rate, by three-quarters of a percentage point, which is a lot.
Joining us now is a regular guest on this program, the Wall Street Journal's David Wessel. David, good morning.
Mr. DAVID WESSEL (Wall Street Journal): Good morning.
INSKEEP: Down about 70 points, 51 points, actually, as I look at a live television feed right now. That's like a normal day.
Mr. WESSEL: There's nothing normal about today. But it does suggest that the markets are pleased that the Federal Reserve has cut interest rates three-quarters of a percentage point, instead of saying oh my God, Ben Bernanke's panicking, let's sell, sell, sell.
INSKEEP: Meaning that they could have feared that the Fed was out of control of the situation but they seem to think that maybe the Fed is in control.
Mr. WESSEL: Correct.
INSKEEP: And how dramatic is it to drop interest rates three-quarters of a percentage point, and what does that mean?
Mr. WESSEL: Well, I do think it's pretty dramatic. The last time the Fed moved interest rates by this much on one day was in 1994, when it raised them. We have to go back to the early '80s for any day on which the Fed has cut rates by this much. And even more impressive: the tone of their statement and the market expectations is that there are more rate cuts to come, perhaps as early as next week when the Fed holds a regularly scheduled meeting.
I think this reflects at least two things. One is they're really worried about the economy, which is performing worse than they had anticipated. And B) they seem to have gotten a little behind the curve with the markets. And I think the reason they came in this morning was to prevent this from being the great crash of '08 by signaling that they're on the case and that they're trying to treat the patient.
INSKEEP: Although you could raise the question why this would work, because people were already expecting the Fed to drop interest rates again and nevertheless, markets were sliding. Has anything fundamentally changed about the situation today?
Mr. WESSEL: I don't think markets expected this, so this was more than expected. But I think that, well, it gets easier to borrow. It's cheaper to borrow. Mortgage rates will be lower, businesses will be able to borrow less. The way the Fed influences the economy is by making borrowing cheaper. The question is whether - are things so bad that no one's going to want to borrow anyways and it won't have any impact?
There's a good bet that it's too late to avoid a recession and this will just quicken the end of the recession or make it more shallow. We don't really know yet. So yes, it has an effect. The markets have an effect on how - on the daily course of business and on people's attitudes and how wealthy they are and how much they spend. So the Feds works both through influencing the market and by making borrowing cheaper.
INSKEEP: So what are the fundamental problems that we're facing that the Fed and others - the Bush administration and others - are trying to attack here? Difficulty with credit? What else?
Mr. WESSEL: I think the - the dif - yeah. Oil prices are up. Housing is down and there seems to be a credit crunch. And that does seem to be a triple whammy that the economy is having trouble shaking off. There was hope that the rest of the world would be so strong - Europe, Japan, emerging markets - that somehow they would hold up the sky as the United States economy slowed. But that's now in doubt.
Overseas markets are very uneasy. It's clear that we exported some of our housing problems to banks abroad, and so it seems to be a problem made in America that's spreading. And one of the things the optimists were counting on was more exports this year, and I think we'll get more exports this year, but it may not be quite as rosy as hoped for.
INSKEEP: We're finding out that markets like China and India will have less money to spend than we might have anticipated just a few days ago.
Mr. WESSEL: Exactly.
INSKEEP: David, stay with us if you would.
David Wessel is with the Wall Street Journal. And Renee is going to bring another voice into the conversation.
MONTAGNE: We move now to London. Joining us on the line is Joanna Chung of the Financial Times. Welcome to our program.
Ms. JOANNA CHUNG (Financial Times): Hello.
MONTAGNE: How are the markets there in Europe responding to the Fed's move this morning?
Ms. CHUNG: Well, I think the European markets actually took a little while to decide what to do. They've been swinging around all over the place. Initially after the Fed cuts, for about maybe 10, 15 minutes they sort of jumped for joy, and then they resumed their fall, they started rising again. And with probably 15, 20 minutes left until the markets close here, it looks like they will close higher.
As of two minutes ago, when I last checked, the main index, the (unintelligible) FTSE 100, for instance, is up nearly 3 percent after a 5.5 percent fall yesterday. And the main index that we look at usually in the European markets is up over 2 percent. But...
MONTAGNE: So...
Ms. CHUNG: ...while they decide there has been incredibly wild gyrations because of the question between whether this is actually the Feds panicking or, you know, is this something to find comfort in or not.
MONTAGNE: So a little happier at the end of the day. But let me ask you the same question that Steve just asked David Wessel. Do European investors see a fundamental problem in the U.S. economy that can't be solved by a quick rate cut in the U.S.?
Ms. CHUNG: I think there is - I think there are a lot of people who are increasingly thinking that this is not a question of rate cuts but a question of the availability of credit. And there are many analysts and economists who argue that the Feds or any central bank can help with the price of credit, but not necessarily the availability of credit. And by cutting and slashing rates, you know, by 75 basis points or any other amount is not necessarily going to impact long term the availability of credit.
So I think that is the main issue at this point. And the other big thing for Europe as well as Asia is the idea that thus far everyone has bought in to this idea of decoupling, and the fact that even if the U.S. does tip into recession, the rest of the world economy will be okay because of powerhouses like China and India. But that theory is quickly evaporating even as we speak because people are thinking that actually if the U.S. economy goes down, the rest of the world is in trouble as well.
MONTAGNE: We've seen the U.S. Central Bank take action today. Are European banks likely to follow suit?
Ms. CHUNG: That is very unclear at the moment. Before the U.S. markets opened, before the Fed decision, there were lots of rumors - in the London markets in particular - that there was some sort of coordinated action being planned by the different central banks. But as we know now, the Fed has acted alone. At this point, some people are speculating that the U.S. move might lead to moves by the Bank of England and the European Central Bank as well. But at the moment that's quite unclear. And at least for the European Central Bank, it has continued to sound warning notes about inflation, which makes it seem that they're not - they're not prepared to cut interest rates just yet.
Mr. WESSEL: Can I weigh in on that one?
INSKEEP: David Wessel of the Wall Street Journal, go ahead.
Mr. WESSEL: Yeah. The Bank of Canada, actually, did join the Fed today. So the Fed is not alone. I think that there's a shot that the ECB will move. History suggests that they eventually follow the Fed. The Fed has done so much. And I remember back in 2001, the ECB moved very quickly from very anti-inflation rhetoric to rate cuts.
So I agree that they're sounding pretty tough on inflation. But it's hard for me to imagine that they won't move eventually.
INSKEEP: Well, let me ask David Wessel to wrap up this part of the program. If inflation is a real worry here, we have heard earlier today from reporters in Asia that they're having trouble right now sustaining their intensive growth. They're having trouble getting low enough wages and cheap enough supplies and cheap enough oil to keep providing cheap products to the United States and other places. Is inflation a danger, particularly if the Fed is trying to stimulate the economy here?
Mr. WESSEL: Yes, inflation is a danger. There are good reasons to have - to expect food and energy prices to be high, given the demand from China and India and the rest of the world. And the Fed is worried about that.
But we know that if you have a deep enough recession, demand for oil and other commodities will come down, and so they're counting on that. But mostly they say we have - we're staring at two worries here, and we had to pick one and we decided, the Federal Reserve said, that growth is the much bigger worry.
INSKEEP: David?
Mr. WESSEL: Others may not feel the same way.
INSKEEP: David Wessel of Wall Street Journal. Thanks very much.
Mr. WESSEL: Thank you.
MONTAGNE: And we heard from Joanna Chung, who is a correspondent for the Financial Times, speaking to us from London.
INSKEEP: And we'll continue to keep you updated. The Dow Jones Industrial Average has now gained back nearly all of the more than 400 points that it lost earlier today.
It's MORNING EDITION from NPR News.