Fed Moves to Ease Financial Crisis, Leads Global Rate Cut
Friday, October 10, 2008
In hopes of abating a growing global financial crisis, the U.S. Federal Reserve led a coordinated central bank effort by cutting its key federal funds lending rate by half a point to 1.5 percent on Wednesday, its lowest level since 2004. The Fed also lowered its discount interest rate by the same amount, to 1.75 percent.
Joining in with their own policy rate reductions today are the European Central Bank, Bank of England, and the Canadian, Swiss, and Swedish central banks. The People's Bank of China announced later that it was also lowering benchmark interest rates, and Australia cut its rates yesterday. The Bank of Japan has little room for cuts, with its interest rates already at 0.5 percent, but expressed its strong support for the coordinated action.
In a press statement, the Fed said today's actions were necessary because the pace of economic activity had slowed markedly in recent months. “The intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit,” the central bank said.
Today's interest rate cut is the latest of several moves by the Federal Reserve to unfreeze credit markets and stimulate the U.S. economy, all brought on because Congress' passage of the historical $700 billion rescue package last Friday has had no immediate impact on the country's financial downturn. Yesterday the Federal Reserve said it would begin buying unsecured corporate debt through a special facility created to support the commercial paper market, which is used by many businesses to finance day-to-day operations. On Monday, the U.S. central bank said it would pay interest on bank reserves. Both liquidity moves, however, have had little effect on the credit crunch or Wall Street.
While many expected the stock market to rally after lawmakers approved the bailout plan for the financial sector, investor worry over politicians' ability to handle the crisis sent stock markets around the world plunging. On Monday, the Dow Jones Industrial Average dropped to less than 10,000 points for the first time in four years, and yesterday's close of 9,447.11 was the lowest since September 30, 2003. And it's not just the Dow – the majority of global stock markets are now trading at five-year lows.
Joining in with their own policy rate reductions today are the European Central Bank, Bank of England, and the Canadian, Swiss, and Swedish central banks. The People's Bank of China announced later that it was also lowering benchmark interest rates, and Australia cut its rates yesterday. The Bank of Japan has little room for cuts, with its interest rates already at 0.5 percent, but expressed its strong support for the coordinated action.
In a press statement, the Fed said today's actions were necessary because the pace of economic activity had slowed markedly in recent months. “The intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit,” the central bank said.
Today's interest rate cut is the latest of several moves by the Federal Reserve to unfreeze credit markets and stimulate the U.S. economy, all brought on because Congress' passage of the historical $700 billion rescue package last Friday has had no immediate impact on the country's financial downturn. Yesterday the Federal Reserve said it would begin buying unsecured corporate debt through a special facility created to support the commercial paper market, which is used by many businesses to finance day-to-day operations. On Monday, the U.S. central bank said it would pay interest on bank reserves. Both liquidity moves, however, have had little effect on the credit crunch or Wall Street.
While many expected the stock market to rally after lawmakers approved the bailout plan for the financial sector, investor worry over politicians' ability to handle the crisis sent stock markets around the world plunging. On Monday, the Dow Jones Industrial Average dropped to less than 10,000 points for the first time in four years, and yesterday's close of 9,447.11 was the lowest since September 30, 2003. And it's not just the Dow – the majority of global stock markets are now trading at five-year lows.
