TOPICS > Economy

Fed Cuts Rate Again in Latest Bid to Shore Up Economy

April 30, 2008 at 6:10 PM EDT
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The Federal Reserve cut a key interest rate by a quarter point Wednesday, bringing the federal funds rate down to its lowest level since late 2004. The move is intended to help address the ongoing housing slump and credit crunch. Analysts discuss the Fed's action and the economic strain on the American public.
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JUDY WOODRUFF: The weakening economy and its impact is where we begin tonight. And it was the main reason the Federal Reserve decided to cut interest rates again today, the seventh time in as many months.

Greg Ip covers the Fed for the Wall Street Journal, and he joins me now.

Greg, it’s good to see you again.

GREG IP, Wall Street Journal: Hi, Judy.

JUDY WOODRUFF: They were expected to cut rate. They did. Why?

GREG IP: Well, because, Judy, as you said yourself, the economy is quite weak. We just heard from the Commerce Department today that, in the first quarter, the economy only grew at an annual rate of 0.6 percent. That’s about the same rate it grew at in the fourth quarter of last year.

And you put those two together, it’s the weakest period for the economy since 2001 when we were in recession. And it could get worse.

Home prices continue to decline. And it’s very difficult for people who want to buy a home to even get a loan because banks are so reluctant to make new loans.

And on top of that, we have the oil price well over $100. That’s eating into consumers’ purchasing power. You put all that together, and it’s clear that there are still significant risks to the economy.

JUDY WOODRUFF: Why a quarter of a percent cut? Why not more than that?

GREG IP: Well, because, Judy, the Fed feels that they’re actually getting to the end of the amount of rate-cutting that they feel they have to do. You have to put this in context. It is the seventh rate cut.

When you add it to the others that they’ve done, since August they’ve brought their main interest rate down by 3.25 percentage points. That’s dramatic. It’s even faster than Alan Greenspan brought the rate down in 2001 when he was chairman and inflation was a lot lower at the time. In fact, the rate right now is well below the inflation rate.

And it’s occurring against a backdrop when there are those who feel the Fed has perhaps cut it too much.

And so, importantly, in a statement that they released today with their rate cut announcement, they gave us strong hints that they will not be cutting it again, unless there’s an unexpected downturn in the economic outlook.

JUDY WOODRUFF: This was the language wherein they removed this sentence that they had had before about being concerned about downside risk to growth?

GREG IP: That’s right, Judy. And reading the Fed is a bit like reading the Kremlin in the old days. There’s as much significance in what they don’t say as what they do say.

So for some months now, they have been saying that there were downside risks to growth, which was code for, “We’re inclined to lower interest rates again.” They took that sentence out, which is code for, “We think we’re going to sit here for a little while and see if all the stuff we’ve already done has the beneficial impact that we expect for the economy.”

JUDY WOODRUFF: Now, what have they seen? What do we think is the tipping — what tipped the balance here for them? What caused them to change?

GREG IP: Well, I think a couple of things. One was just the cumulative stuff they’ve done so far, the number of rate cuts, the fact that we’ll have over $100 billion in tax rebates going out very soon, and they’ve also had a couple of unorthodox moves basically designed to get more cash out to the banks and the securities dealers in hopes they will use that money to lend more.

And there have been signs of improvement in the financial markets, which has been the locus of the crisis that’s probably driven the economy into recession. Stock prices are up about 9 percent since their low in early March.

And the rates on risky types of bonds, such as those backed by mortgages and the bonds issued by corporations, have come down quite significantly when you compare them to super-safe treasury bonds.

That kind of decline in borrowing costs is a sign that lenders and investors are tiptoeing back into the markets and recovering some of their appetite for risk. And that’s a necessary condition for the economy to put this weak spot behind it.

JUDY WOODRUFF: Now, we saw they did make it known that two of the Federal Reserve governors voted against this rate cut. What’s behind that?

GREG IP: Well, that’s a reflection of many of the concerns on the other side of the Fed’s job that they have to worry about, because the Fed’s job isn’t just to maintain full employment but to also maintain stable prices.

And the fact of the matter is that inflation has been running at about 4 percent for some time now, which is well above anybody’s definition of stable prices. And what you have is some officials at the Fed who believe the Fed has concentrated too much on the risks to unemployment and not enough on the risks to inflation.

Now, the main view at the Fed of Chairman Ben Bernanke is that the rise in inflation we’ve experienced in the last year is temporary. Once oil and food prices stop going up, which is the bet of the most knowledgeable authorities, then inflation will come back down.

After all, you have unemployment going up, and it’s very difficult for wages to go up in that sort of situation. And you kind of need that to happen to get a wage price spiral. But you can’t take that for granted.

In particular, it’s of great concern to Mr. Bernanke and his colleagues that inflation expectations have risen, which means that, if you look at the way investors and the public behave, they’ve begun to think that inflation will stay at these levels.

And the big risk is that they then build that into their own behavior when they’re negotiating prices and wages and what we think is a temporary increase in inflation will become permanent.

JUDY WOODRUFF: All right. Well, giving us a bit of a road map, Greg Ip with the Wall Street Journal. Thanks very much.

GREG IP: Thank you, Judy.

How Americans are coping

Stephanie Bittner
Credit Counselor
It's going to help people that have home equity lines of credit, because it will affect the prime rate, which will reduce their rates on their loans.

JUDY WOODRUFF: And now, Ray Suarez has a closer look at how Americans are struggling with -- and coping with -- the growing problems of housing, debt and credit.

RAY SUAREZ: And for that, I'm joined by Ronald Clarkson, a housing counselor and program director of the Foreclosure Prevention Program at Housing Counseling Services in Washington, D.C.

Stephanie Bittner is a credit counselor with the Consumer Credit Counseling Service of Delaware Valley.

And Jane Bryant Quinn is a best-selling author and columnist for Newsweek and Bloomberg.com.

And, Stephanie, as we just heard, the Fed lowered the Fed funds rate a quarter of a point to 2 percent. In the near term, is this going to be a help to the people that you're working with?

STEPHANIE BITTNER, Consumer Credit Counseling Service of Delaware Valley: It's going to help people that have home equity lines of credit, because it will affect the prime rate, which will reduce their rates on their loans.

In addition, anyone looking to possibly get a home equity line of credit, they'll also benefit from this, as well as people that have adjustable rate mortgages and their ARM is about to reset. This can also benefit them, as well.

RAY SUAREZ: Ronald Clarkson, same question. Is this going to help people who really are in trouble with housing?

RONALD CLARKSON, Housing Counseling Services: It will, to a degree in that -- to the degree that people who are looking at home loans that are resetting in the future, these people are people who have been looking at it, looking at that deadline approaching, and feeling that this is something that they possibly could not handle.

Well, now with this lowered interest rate, their chances of being able to stay in their home do increase slightly, depending on their source of income.

RAY SUAREZ: A quarter of a point, I mean, how much money are we talking about in an eventual mortgage payment?

RONALD CLARKSON: Well, it could be that it winds up being between, say, $25 to $35 or so, given -- for every $100 that they borrow on the home -- excuse me, not every $100, but every $1,000 they've borrowed on the home. And so it could be substantial, depending on the price of the home.

RAY SUAREZ: Jane Bryant Quinn, is a quarter-point reduction in the Fed funds rate something that's likely to ease the pain in the broad economy for people who are in debt trouble?

JANE BRYANT QUINN, Columnist, Newsweek: Oh, sure, Ray. And, actually, I think you have to go back and look at what interest rates were, say, or mortgage rates, in particular, back in September and October.

When this whole foreclosure crisis started, they were looking at the possibility of rates resetting to 10 percent or 11 percent or 12 percent, in some of these subprime loans.

Well, interest rates have come down a lot since then. So the subprime loans still aren't great, and our foreclosure rate is just rising tremendously.

But, nevertheless, some of those loans are going to reset now at 8 percent or 9 percent, and that's going to be a huge difference. It means that more people who have these subprime loans may be able to weather this storm.

Mortgage ripple effects

Ronald Clarkson
Housing Counseling Services
There are the folks who are dealing with adjustable rate mortgages, and these are folks who, of course, are being impacted by these rate decreases.

RAY SUAREZ: Well, you're dealing with individuals, and how people get into trouble is an individual story. But are you hearing commonalities when people come to you and they feel that they're about to hit the wall, they're afraid of losing their homes? Are they starting to be common themes that you're hearing among your clients?

RONALD CLARKSON: Yes, I would have to say so. First of all, there do tend to be people that fall in different categories.

There are the folks who are dealing with adjustable rate mortgages, and these are folks who, of course, are being impacted by these rate decreases.

You also have people who, for whatever reason, have gotten into loans that were over their heads. And the rates may not be changing; they may be flat rates. But, for whatever reason, they got into loans that were over their heads and they're struggling to try to find ways to keep those homes.

And you have other people who chose to refinance their loans and are finding it difficult to maintain the income or maintain the lifestyle that they chose previously, in order to stay in that home and for whatever reason that they chose to refinance.

So they do fall into different categories, and it's something where many people are finding different avenues to resolve those issues, as well.

RAY SUAREZ: Stephanie Bittner?

STEPHANIE BITTNER: I would just say basically the same exact thing. And, you know, especially in my market -- we're in Philadelphia -- we're seeing a lot of people that were in the mortgage industry or related industries, whether it be mortgage underwriter or processor, but it could be appraisers or, you know, construction-type of industry workers who are either losing their jobs altogether or the work is getting cut back so their income is being reduced.

And that's, also, you know, obviously affecting their finances and their, you know, payments to their creditors.

RAY SUAREZ: So these are people with revolving credit who weren't in trouble until they started to feel the knock-on effects of a downturn in housing?

STEPHANIE BITTNER: A combination of that and combination of people that were truly living paycheck-to-paycheck prior to that, so when something like this happens, it just kind of throws off their whole financial situation.

Rebate checks

Jane Bryant Quinn
Author and columnist
I think that we still need this stimulus very much. I don't think you can say that somehow the recession is passed, we don't have to worry about it anymore. That just isn't true.

RAY SUAREZ: Jane Bryant Quinn, earlier this month, the president promised help is on the way. And, indeed, the first checks of the $107 billion-plus stimulus rebates are on their way to consumers.

Are those checks arriving in mailboxes of houses that now are looking at very different financial situations than when this program was first proposed and passed?

JANE BRYANT QUINN: Well, I think that we still need this stimulus very much. I don't think you can say that somehow the recession is passed, we don't have to worry about it anymore. That just isn't true.

This stimulus is going to be a really important part of trying to keep the economy moving. And my suggestion is that, when you get this $600 check or $1,200 check, you don't go out and buy a new pair of shoes. You go out and say, "I'm going to use this to reduce my debt."

This is really a wonderful opportunity to do something about your credit card debt. And, you know, the economy is still very, very weak. We still have recession looking at us. Last year, foreclosures were up 57 percent March to March.

Now, this is really bad. And the foreclosure rate is accelerating, and the heart of the slowdown and the problem with the consumer spending is lying in these foreclosure rates, the problems people are having with their mortgages.

So I think the stimulus is very necessary. And if we don't solve this foreclosure problem, there may still be another stimulus to come.

RAY SUAREZ: But is it going to stimulate anything, if people use it to pay down a credit card or pay down a home equity line of credit, instead of buying that pair of shoes you mentioned?

JANE BRYANT QUINN: Oh, sure, it will, because, first, they have less interest costs, and that's very important. Furthermore, the fact is a lot of people will go out and spend it. I'm just hoping that, you know, your viewers, Ray, are smart enough not to.

RAY SUAREZ: Ronald Clarkson, for people who are entering this process, they realize that either after the reset, or as they take a look at their household finances, or one of the wage-earners in the household has lost a job, what should people do? What's their first step as they try to dig themselves out?

RONALD CLARKSON: Well, the first thing is to seek help. Many homeowners, unfortunately, who do fall into these circumstances do not seek help. And those are the people who wind up going through foreclosure, unfortunately.

The people who seek help, who reach out, seek help either from counseling agencies or from local government resources, or even from family members are the people who wind up saving their homes.

So we encourage people to take the deep breath, go ahead, and seek help, and, you know, make that step. Then, also, hopefully, they'll sit down and do an analysis of their finances and see where they stand at that date and time.

RAY SUAREZ: Are you hearing from people for whom it's already too late?

RONALD CLARKSON: Yes, we are. Unfortunately, we are. And we do have to tell them that there's nothing at this point that we can see that will save the home.

But we do try to make them look forward or help them to look forward into the next step. OK, if you don't save that home, what are you going to do next? Make a plan for where you're going to live in the future. Make a plan for how you're going to re-establish your ability to save and also, hopefully, buy another home in the future.

RAY SUAREZ: Stephanie Bittner?

STEPHANIE BITTNER: I would really encourage people that are in credit card debt, in particular, to really just stop using the credit cards. If they have extra money to put down on the cards, rule of thumb, you always want to put it towards the one with the highest interest rate.

If you're paying high rates, call the creditors, see if they will reduce the rates for you. And, lastly, if you can't kind of handle it on your own or you're a little overwhelmed, seek out to a national, an NFCC-affiliated credit counseling agency who's reputable, and can really help you through the process, and prioritize, and just let you know what options are out there.

Household choices

Stephanie Bittner
Credit counselor
Basically, a lot of people are staying home more often. You know, they're cutting back eating out, cutting back on the entertainment, cutting back using their car.

RAY SUAREZ: What kind of choices are you seeing people make at the household level trying to handle all this, get through a rough patch?

STEPHANIE BITTNER: Basically, a lot of people are staying home more often. You know, they're cutting back eating out, cutting back on the entertainment, cutting back using their car, which is all saving them money all to kind of pay for the utility bills, pay for the mortgage payment, pay for the car payments. So they're making changes in order to get by every month.

RAY SUAREZ: Ronald Clarkson, hard choices?

RONALD CLARKSON: Absolutely. Credit cards are one thing, but when a person is looking to save their home, they tend to take even more severe steps. Some wind up selling that SUV and downsizing to a smaller vehicle. Others sell a car altogether and find other means to get to work.

And then there are those people who look at other options that might be available in terms of their retirement plans, dipping into those, taking some real severe steps that are proving to save some homes, but people are having to pay a price for it.

RAY SUAREZ: Jane Bryant Quinn, the government had announced various programs to help people before they lost their homes, change the tolerances on some loans, and try to re-jigger some things. Is this aid keeping people in their homes? Or are we seeing them helping the number of people it was imagined they would help?

JANE BRYANT QUINN: So far, Ray, they're helping only a very small number of people. You're seeing Fannie Mae, they're buying home -- or they're investing in mortgages that are in larger amounts than they were allowed to before.

And this is terrific mostly for prime borrowers who want to refinance, who want to get a better mortgage, so that's terrific. But it's really not for the class of people that are facing the foreclosure problems.

What's happening with the foreclosure is really interesting, because they do have -- the government does have some programs out there. It's trying to persuade the lenders to cut the amount that the mortgages are owed, to restructure mortgages so that they're affordable for people so that they won't lose their homes.

But, you know, these lenders, they have these pools that they have invested in. And although some people aren't paying their mortgages, others are.

So you have this anomaly where some people are struggling with these mortgages, but the lenders basically are not losing a lot of money yet. And so they're looking at it, and they're saying, "Why should I cut people's mortgages? Why should I cut them a deal? I'm still ahead. I'm doing OK."

And as long as that is true, you're not going to find the lenders stepping forward and saying, "OK, we're going to cut deals with people." Some deals are being cut, but not an awful lot of them.

RAY SUAREZ: What about banks who issue credit cards as opposed to lenders who secure mortgages? Are they ready to deal, Stephanie Bittner?

STEPHANIE BITTNER: Actually, what we've seen over the past, I want to say, eight weeks or so is some of the credit card companies are actually increasing the interest rates on clients, even if they've never been late, kind of anticipating the risk. So we're kind of seeing the opposite situation happen, in a sense.

RAY SUAREZ: Guests, thanks a lot.

STEPHANIE BITTNER: Thank you.

RONALD CLARKSON: Thank you.