Oct. 8 (Bloomberg) -- The Federal Reserve, European Central
Bank and four other central banks lowered interest rates in an
unprecedented coordinated effort to ease the economic effects of
the worst financial crisis since the Great Depression.
The Fed, ECB, Bank of England, Bank of Canada and Sweden's
Riksbank each reduced their benchmark rates by half a percentage
point. The Bank of Japan, which didn't participate in the move,
said it supported the action. Switzerland also took part. China's
central bank separately cut its key rate 0.27 percentage point.
``We are now looking at the first page of the global-
depression playbook,'' said Carl Weinberg, chief economist at
High Frequency Economics in Valhalla, New York. ``The only
solution is to cut rates as close to zero as you dare,'' pump
money into the banking system ``hand over fist'' and increase
government spending, he said.
Today's decision follows a global meltdown that sent U.S.
stock indexes heading for their biggest annual decline since
1937; Japan's benchmark today had the worst drop in two decades.
Policy makers are also aiming to unfreeze credit markets after
the premium on the three-month London interbank offered rate over
the Fed's main rate doubled in two weeks to a record.
Rate Levels
The Fed reduced its benchmark rate to 1.5 percent. The ECB's
main rate is now 3.75 percent; Canada's fell to 2.5 percent; the
U.K.'s rate dropped to 4.5 percent; and Sweden's rate declined to
4.25 percent. China cut interest rates for the second time in
three weeks, reducing the main rate to 6.93 percent.
Stocks at first rallied after the announcement, then turned
lower. Some analysts said the central banks should have lowered
rates by more, and predicted further reductions. Economists at
Goldman Sachs Group Inc. and Morgan Stanley now project another
half-point move by the Fed at its Oct. 28-29 meeting.
The Standard & Poor's 500 Stock Index fell 1.1 percent to
984.94 at the close in New York, capping a 16 percent loss in six
trading days. Europe's Dow Jones Stoxx 600 Index slumped 6
percent. Japan's Nikkei 225 Stock Average lost 9.4 percent to
9,203.32 earlier today, before the announcement.
``The recent intensification of the financial crisis has
augmented the downside risks to growth and thus has diminished
further the upside risks to price stability,'' the central banks
said in a joint statement today. ``Some easing of global monetary
conditions is therefore warranted.''
World Recession
Global policy makers are reducing rates as economies weaken
around the world. The International Monetary Fund said the global
economy is heading for a recession in 2009 and increased its
estimate of losses from the financial crisis to $1.4 trillion.
The crisis already prompted the U.S. to enact a $700 billion
program to buy troubled assets from banks in an effort to prop
them up. U.K. banks will get a 50 billion-pound ($87 billion)
government bailout, while Spain will spend as much as 50 billion
euros to buy bank assets. European governments have also moved to
rescue banks Fortis, Dexia SA and Hypo Real Estate Holding AG.
The U.S. Treasury said today it sees ``severe dislocations''
in the government bond market and plans to sell more debt to
address shortages. The market problems ``are across the Treasury
market curve'' and are primarily affecting medium- and long-term
debt, from two-year notes through 30-year bonds, a Treasury
official told reporters.
The Fed's Open Market Committee, which voted unanimously for
today's move, said in its statement that ``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.''
Europe's Reversal
European policy makers were forced into action after the
collapse of Lehman Brothers Holdings Inc. last month roiled world
financial markets and caught them off guard. The ECB raised rates
in July and Bank of England Governor Mervyn King warned the
government as recently as Sept. 16 that inflation was set to
accelerate.
The decision to let Lehman go ``had enormous, very
unfortunate consequences,'' European Central Bank President Jean-
Claude Trichet said Oct. 2. On the same day, he signaled the ECB
was ready to cut rates.
ECB council member Ewald Nowotny said in an interview that
today's rate reduction ``should not be seen as a first step in a
possible series'' by the ECB. ``The situation has to be assessed
as we go along,'' and the current rate level ``will ensure that
inflation expectations remain anchored,'' said Nowotny, chief of
Austria's central bank.
Deteriorating Economy
Today's action comes a day after Fed Chairman Ben S.
Bernanke failed to assuage investors' concerns about the
deteriorating economy by signaling he was ready to lower
borrowing costs.
Fed officials, who have kept their benchmark rate at 2
percent since April, may have wanted time for their record loans
to the financial industry and new programs, including purchases
of commercial paper, to bear fruit before lowering rates.
Investors instead perceive the economic outlook deteriorating
more rapidly, necessitating rate reductions.
The declines in U.S. shares the past two days followed pre-
market opening announcements of fresh actions by the Fed to
unblock credit markets. On Oct. 6, the U.S. central bank doubled
its planned auctions of cash to banks to as much as $900 billion.
Yesterday, it unveiled a unit to buy commercial paper, debt used
by companies for short-term funding.
Central bankers acted two days before they gather with
finance ministers from the Group of Seven industrial nations in
Washington. The timing suggests the central banks sought to avoid
any appearance of being influenced by governments, said Ted
Truman, former chief of the Fed's international-finance division.
`Before Friday'
``It was clear that if they wanted to do it, they had to do
it before Friday,'' said Truman, now a senior fellow at the
Peterson Institute for International Economics in Washington.
``they don't want to see as being coordinated by their finance
ministers into doing this.''
Both U.S. presidential candidates said they backed the Fed's
rate cut. Democrat Barack Obama said more was needed and said he
hoped the global coordinated response to the crisis continued at
the G-7 meeting of finance leaders in Washington this week. Both
he and Republican John McCain said the Fed action had to be
accompanied by further moves to help homeowners.
Obama has surged in polls in the past three weeks as the
credit freeze worsened and global equity markets plunged, with
respondents saying he would do a better job managing the economy.
An NBC-Wall Street Journal poll conducted Oct. 4-5 found Obama
supported by 49 percent of registered voters, a 6-point margin
over McCain. Two weeks ago an NBC-Journal poll put Obama's lead
at 2 points.
Bernanke Message
Bernanke said in a speech yesterday that an intensifying
credit crunch means officials must ``consider'' lowering
borrowing costs.
In more typical market conditions, stocks rally when a Fed
chief indicates he'll reduce rates. Now, Bernanke's message may
have less power because traders already anticipated for weeks
that policy makers would need to make that move, and because of
rising concern even rate cuts may do little to immediately help
banks scrambling to reduce their vulnerability to loan losses.
``This is an extraordinary circumstance,'' said Former Fed
Governor Laurence Meyer, now vice chairman of Macroeconomic
Advisers LLC. ``If markets are totally frozen it doesn't help. It
certainly builds confidence psychologically.''
By Scott Lanman BLOOMBERG
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