Global central banks jointly cut interest rate to fight financial crisis

The world’s major central banks joined together to cut interest rates Wednesday to fight a spreading panic, which is endangering the flow of credit and the world’s economies. The Federal Reserve, European Central Bank and Bank of England cut interest rate by one-half percentage point. The move was joined by central banks in Canada, Switzerland, and Sweden and blessed by the Japanese, whose rates are already so low. Although the Fed didn’t mention China in its announcement, China cuts its benchmark one year lending rates by 0.27 percent and suspended the withholding tax on interest income.

These unprecedented coordinated interest cuts were taken after financial crisis spread around the globe and major world stock markets tumble on Monday. Lower rates may do little to cure the epidemic, but do help offset the unwelcome credit squeeze caused by banks reluctance to lend even to each other. Given central banks’ role as a lender of last resort the interest cut will lower bank borrowing costs e.g. those borrowing from the Fed’s discount window. That means home equity loans, credit cards and other floating-rate loans will become cheaper as they all fluctuate depending on what the central bank does.

The Fed actions

In these joined efforts, the U.S. Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1.5 percent. The slash took the rate to its lowest level in more than four years.

Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, 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. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

Stocks dropped again

Despite of the Fed interest cut, the Dow Jones industrial average lost another 189 points, or 2 percent, to close at 9,258. It was the sixth straight day of losses for the Dow. The index has shed more than a third of its value, nearly 5,000 points, since its all-time high, set one year ago Thursday.

The day's losses were lighter; the Nasdaq composite index fell 0.83 percent and the Standard & Poor's 500 dropped 1.13 percent.

Chart: WSJ.com


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