What's Driving The Market Plunge?

Originally published on September 22, 2011 6:01 pm
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From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.


And John is this really all it took, a few words from the Fed yesterday to start this sell-off?

JOHN YDSTIE: Well, that got things rolling downhill yesterday, but there was also news that China's factory output slowed for the third straight month and then some data today showing Europe barely growing, so fears that the U.S. and Europe might slip back into recession emerged again. And this recession worry also comes in the context, of course, of negotiations with Greece aimed at avoiding a debt default. That's been a source of volatility in the market for months.

BLOCK: And what about that, John? Was there any progress with Greece today?

YDSTIE: And then, this afternoon, the FT reported a senior French official saying that 16 European banks are close to failing their stress tests and will have to seek new funds at once. All this eroded confidence further. European banks were hit especially hard, for instance, shares in Credit Agricole, a French bank, dropped almost 10 percent today.

BLOCK: Wow. And John, what about the Fed's action yesterday? Along with those words we talked about, about significant downside risks to the economic outlook, the Fed decided to put in place something called Operation Twist. It was supposed to lower long-term interest rates and help the economy. Is the sell-off a judgment from investors that they think it's not going to work?

YDSTIE: And the rates on the third-year bond are now below three percent, so the Fed's announcement had some success. Now, the Fed had a good deal of help from investors fleeing the stock market and buying U.S. bonds as they look for a safe place to put their money.

BLOCK: A safe place to put their money, John, even though, we'll remember, S&P downgraded U.S. debt in August, and there's all this rhetoric about America not being able to pay its bills.

YDSTIE: Absolutely true, Melissa. But I guess it's about finding the least dirty shirt you can if there are no clean shirts in your closet. And speaking of that, the U.S. dollar also strengthened today. It hit a seven-month high against a basket of currencies. That contributed to a big fall in the price of gold and the price of oil went below $80 a barrel. Actually, oil and other commodities also lost ground today because of fears demand will fall if there is another recession.

BLOCK: Okay. John, thanks so much.

YDSTIE: You're welcome.

BLOCK: That's NPR economics correspondent John Ydstie. Transcript provided by NPR, Copyright NPR.