RACHEL MARTIN, HOST:
Investors in the U.S. and across the world are prepared for another volatile day in the stock market. Yesterday, the Dow Jones Industrial Average dropped more than 4 percent. That wasn't a record, but the 1,175-point drop was the biggest single-day slide in history. Stock values have dropped more than a trillion dollars since Thursday. David Wessel joins us now. He's a senior fellow in economic studies at Brookings and the director of the Hutchins Center on Fiscal and Monetary Policy.
Hey, David. Thanks for being here.
DAVID WESSEL: Good morning.
MARTIN: What's going on? And why is this happening now?
WESSEL: Well, obviously what's going on is stocks have taken a pretty severe tumble. It's always hard to know exactly why these things happen when they do. Stocks have been up for a long time. Everybody who said they're too high is now reminding us that they said that. The people who said it could go on are being very quiet. There are some signs that there were some strategies in the markets, some people betting that the market would be calm for a while. And when that fell apart, they exacerbated the decline. And then, of course, interest rates have started to rise partly because the economy is so strong and inflation's picking up. And that tends to depress stock prices as people move into other investments.
MARTIN: So stocks are still higher than they were at the beginning of 2017. The Dow rose over 30 percent in the first year of the Trump administration. So at what point would this drop signal a real crisis for the economy?
WESSEL: Well, I think there would be a couple of things. One is, of course, when the stock market goes down a lot, people who have stocks tend to spend less. So it could hurt consumer spending, but that's not a very big effect usually. Secondly, if it somehow becomes a crisis of confidence, if it looks like they're not adults in charge of the U.S. economy, this thing can then have ripple effects on businesses and consumers. And finally, if there's some financial institution out there that bet the wrong way and gets into trouble - some big bank or hedge fund or something - that kind of financial panic can make something like this more than just watching TV and watching the stock market go down.
MARTIN: Right. So the market is supposed to tell us about the future of the economy, right? So what are we, as laypeople, supposed to take away from this?
WESSEL: Well, I think it's important to remember that the stock market is not the economy. The economy has been pretty strong. In fact, one reason interest rates are rising is that the economy is doing so well. So one thing that people are looking at is they're looking at what's happening to long-term interest rates. And they tend to go up when people are optimistic about the economy and down when people are pessimistic. The fact that long-term interest rates are rising, which is not so good if you want to get a mortgage, is a sign that, so far, people think the economy is doing pretty well and this doesn't portend a recession, at least not yet.
MARTIN: All right. David Wessel, senior fellow in economic studies at Brookings. Thanks so much, David.
WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.