Fed Expected to Lower Federal Funds Rate
STEVE INSKEEP, host:
Some new numbers are out on the economy this morning. Prices at the wholesale level were down sharply last month, led by a big drop in energy costs. And that is good news for those who are hoping that the Federal Reserve will lower interest rates. It means that policy makers have a little more leeway to cut a key interest rate today without worrying quite so much about inflation. That's a concern for plenty of people beyond Wall Street traders, as NPR's Jim Zarroli reports.
JIM ZARROLI: John Purinton sells sailboats and powerboats from a marina in northern New Jersey. From his office he can see the imposing skyline of Wall Street just across the Hudson River. Not unlike the bankers and traders in those towers, Purinton is closely following what's happening with interest rates right now.
Mr. JOHN PURINTON (Salesman): I think if the interest rates get cut, the fall boat show season will be a heck of lot better than if they're not.
ZARROLI: Purinton says a lot of people buy boats on credit. Often they do it by getting second mortgages on their homes. So the question of whether the Fed lowers interest rates today and by how much is a practical concern for him.
Mr. PURINTON: Depending on what happens, some folks think a quarter point will kind of stem the flow and that a half a point will start to reverse things. Obviously either are going to be great for us, because when you're talking about a $300,000 loan the half a point is huge, and a quarter point's nothing to bat your eyelashes at, either.
ZARROLI: If ever there was an interest rate cut that was preordained, it is this one.
Mr. CHRIS VARVARES (President, Macroeconomic Advisers): The Fed has signaled fairly clearly that it will be cutting rates.
ZARROLI: Chris Varvares is president of the research firm Macroeconomic Advisers. Varvares says that for more than a year, Fed policymakers have kept interest rates where they were. To cut rates, they said, would fan the flames of inflation.
But on August 16th, Fed policymakers reversed course. They cut one of the two interest rates they control and suggested they were ready to cut the other one too. They issued a statement saying they had grown worried about what they called the downside risk to the economy.
Mr. VARVARES: It really set up expectations in the market that the Fed would be cutting rates at the next opportunity. Since that time, a number of Fed speakers have indicated that they are focused as well on the downside risks to the economy.
ZARROLI: Varvares says the Fed changed course because problems in the subprime mortgage market were spreading. With losses mounting, investors no longer wanted to put money into the mortgage business. A lot of lenders were forced into bankruptcy, and the housing downturn suddenly looked like it might undermine the economy.
Economist Louis Crandall of the research firm Wrightson ICAP says there is a huge amount of uncertainty out there right now.
Mr. LOUIS CRANDALL (Economist, Wrightson ICAP): We face an information deficit in the market. We know there are subprime losses out there. We don't know exactly where they all reside. And so anyone who is potentially at risk of having subprime problems is having trouble attracting funding right now.
ZARROLI: Crandall says in times like these, interest rate cuts can act as a confidence builder.
Mr. CRANDALL: And even if they don't directly address what's going on, they provide a comfort level and they're the most visible reminder a central bank can provide that it stands ready to prevent a problem from spreading.
ZARROLI: Crandall says that's what the Fed is trying to do now. For Fed officials, one risk is that inflation pressures haven't really eased much yet and that there is little room to cut rates without feeding those pressures. Critics say the subprime crisis happened in part because the Fed cut rates too much, making it too easy for unqualified borrowers to get money. But expectations for a rate cut are so high right now that not doing so would send an unpleasant jolt through the financial markets. That means the Fed may have little choice but to go ahead with a cut that nearly everyone is expecting today.
Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.