Dow Loses Nearly 3.6 Percent. How Will Markets Fare On Tuesday?

Transcript

STEVE INSKEEP, HOST:

Never mind - the stock market that fell so far in recent days is up today. Well, maybe not never mind. Something happened in recent days. Chinese stocks fell, U.S. markets are still down in recent weeks, and it is by no means sure the decline is over. The Shanghai stock market continued falling today. And then China's central bank acted to restore some confidence that it's on the case. NPR's Jim Zarroli has been watching the world markets overnight. He's in our New York bureau.

Hi Jim.

JIM ZARROLI, BYLINE: Hi Steve.

INSKEEP: What is the Chinese central bank doing?

ZARROLI: Well, it's done two things. It's cut interest rates slightly. It's also lowered the reserve requirements for banks which means they don't have to hold onto as much money, then they can lend it out more. Both of these moves are designed to get the banks to issue more loans. The idea is, you know, that will lead to more hiring, more building, and it will stop the slowdown in growth that we're seeing in China. This is the - it's a kind of move, really, that investors have been hoping the central bank would take.

INSKEEP: Although that's something that, if you're a layman, makes you anxious - wow, lower reserve requirements at banks, things are scary so keep less cash on hand. That's the net effect of that.

ZARROLI: Yes, it is. This is a sort of shot of adrenaline for the economy. It could boost growth in the short term. But in the long term, it doesn't really address the problems China faces, and it could aggravate them. I mean, China has been expanding and building for years and years. Its banks have already lent out a lot of money for, you know, factories and apartment buildings and businesses. But we're at the point where a lot of economists think, you know, China has plenty of capacity, if not too much capacity. And banks have a lot of bad loans on their balance sheets. I mean, China needs to take - China needs to make profound structural changes in its economy. What it did this morning doesn't begin to do that.

INSKEEP: Well, let's just remind people this is the latest of several moves by the Chinese central bank or the Chinese government to deal with concern in the Chinese stock markets and concern about the broader Chinese economy. Is there any indication that even in the short term that the Chinese move will do any better than the other recent efforts?

ZARROLI: Yeah, I mean, China has tried recently to do different things to prop up its economy, prop up its stock market. And this is the kind of thing they've done over the years, but there have been diminishing returns, frankly. It just hasn't had the effect that the government had hoped, and I think that's one of the things investors are really nervous about. That's a big reason why we're seeing the slide in stock prices that we've seen in China.

INSKEEP: Well, how much damage has been done to U.S. stocks, and if we can get a sense of it at all on this morning, the U.S. economy?

ZARROLI: It's a very volatile situation. The VIX, which is a measure of volatility, hit its highest level yesterday since January 2009, which, as you know, was right after the financial crisis. These sorts of things happen in the economy - or in the stock market. The important thing to remember is that this is not really about the fundamentals of the U.S. economy. This is happening because of concerns about slowing growth in places, like in China especially, but also how that will affect Russia and Brazil, countries that have troubles of their own.

INSKEEP: Jim, we're hearing elsewhere in the program about the U.S. central bank, the Federal Reserve, which has been signaling that it is likely soon to raise interest rates for the first time in years, something that you do when you want to keep the economy from overheating, slow things down a little bit. Any indication as to whether the Fed will go ahead with that, given all these concerns in recent days?

ZARROLI: Well, I think a lot of people are saying the Fed should reconsider whether it wants to do that. The Fed officials have been hinting they would raise rates this year. But yesterday, the head of the Atlanta Fed, Dennis Lockhart, said he doesn't think - you know, he still thinks a rate hike is coming but maybe not so soon. He talked about the fall in oil prices, saying, you know, just it's - the inflation picture is just not very clear right now.

INSKEEP: Jim thanks very much as always.

ZARROLI: You're welcome.

INSKEEP: That's NPR's Jim Zarroli, giving us what insight we can as the markets move day to day. Transcript provided by NPR, Copyright NPR.