Posted on Wed, Oct. 08, 2008
last updated: November 24, 2010 01:49:34 PM
WASHINGTON — Amid another swoon on global stock markets, the Federal Reserve early Wednesday announced a half-point cut to its benchmark lending rate. Five other central banks moved in tandem in a coordinated effort to bring calm to panicky markets everywhere.
The Fed released a short statement at 7 a.m. EST, saying the dramatic half-point cut, which brings the federal funds rate down to 1.5 percent, was being taken jointly with the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Swiss National Bank and Sweden's central bank. The nations all made half-point cuts to their interest rates.
"The recent intensification of the financial crisis has augmented the downside risks to growth," the Fed statement said, pointing to a deepening global economic crisis that will reduce inflation pressures.
Traders on Wall Street initially continued the global sell-off after the opening bell. The Dow Jones Industrial Average was down more than 200 points in the first minute of trading. it rebounded in the first hour and was up 120 points, but closed down 189 points. The Dow had already dropped 13 percent over the past five trading days.
Stock market drops have reduced the value of Americans' retirement savings by more than $2 trillion in value over the past 15 months, according to the non-partisan Congressional Budget Office.
Just Tuesday, Fed Chairman Ben Bernanke signaled further rate cuts in a speech to the National Association for Business Economics. But most analysts thought the earliest it would come would be Friday when finance ministers of the world's industrialized nations meet in Washington.
What changed? Financial markets in Asia and later Europe opened in turmoil on Wednesday. Japan's Nikkei plunged 9.3 percent, and exchanges in Hong Kong and Taiwan dropped 8 percent and almost 6 percent respectively. Many European exchanges the touched five-year lows as panic spread.
The day began with a free fall in Tokyo, the biggest one-day drop since the "Black Monday" crash in October 1987 and the third-biggest loss in its history. The Nikkei is now at its lowest level in five years.
Fumbling for a response, Prime Minister Taro Aso told a session of parliament the dive "isn't normal" and said the plunge was "frankly beyond our imagination."
"We have huge fears going ahead," he said.
Hardest hit were the automakers. Toyota saw its shares tumble 11.6 percent, and Honda fell 10 percent, both dropping on fears that a U.S.-led global recession would bite severely into auto sales.
In Hong Kong, furious investors clashed with police demanding repayment of investments linked to Lehman Brothers, the U.S. bank that went under last month, as the key stock sunk 8.17 percent to close at 15,431.73, the first close below 16,000 in two years.
Hundreds of protesters swarmed several major banks and the city's legislative assembly, demanding that lawmakers help them recoup their money. Scuffles erupted outside the landmark Bank of China building.
Elsewhere around the region, Sydney's market closed down 5.0 percent, Seoul lost 5.81 percent and Shanghai dropped 3 percent.
The coordinated move by central banks was almost without precedent, but was more a symbolic move to show that central banks were on the job together to address a crisis that is increasingly global in nature.
The problem gripping the world banking sector is one of liquidity, meaning banks are unwilling or unable to lend to each other or businesses. That Fed has made available almost $800 billion in emergency short-term loans to keep the banking sector functioning.
On Tuesday, Bernanke bypassed the banking sector altogether and announced he'd start providing short-term credit to major U.S. corporations who cannot find buyers for their short-term promissory notes called commercial paper.
Wednesday's rate cut may help U.S. consumers over a longer horizon, since banks tend to mirror moves in the fed funds rate - a rate banks charge each other for overnight lending to replenish reserves.
Commercial banks generally move their prime rate - charged on loans to their best customers, in lockstep with the fed funds rate. The prime rate should come down to 4.5 percent - although banks are doing very little lending and instead are building reserves for the long winter of a probable recession in the economy.
The same is happening with U.S. consumers, who drive about 70 percent of U.S. economic activity. The Fed reported Tuesday that consumers' use of credit dropped for the first time in a decade
The last time Europe's central bank moved alongside the Fed was after the 9-11 terror attacks. Part of the global volatility on stock exchanges comes from concern the European Union's central bank is structured in a way that restricts its ability to move aggressively like the Fed.
That isn't a concern in England, where the Bank of England on Wednesday announced it would inject directly into several top banks upwards of $350 billion to ensure they have cash to lend and continue to function as normal as possible. This differs in approach from the $700 billion made available by the U.S. Congress to purchase bad assets and get them off of bank balance sheets.
ON THE WEB
Read the press release at federalreserve.com
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