.Central Banks Coordinate Global Cut in Interest Rates
In a move of unprecedented scope, the world’s major central banks lowered their benchmark interest rates Wednesday, a coordinated effort to halt a collapse of share prices and a freeze in credit markets that threatens to set off the first global recession since the early 1970s.
The action failed to calm gyrating markets, however, amid the growing realization that a serious and prolonged recession may be difficult to avoid.
The Federal Reserve, the European Central Bank, the Bank of England and the central banks of Canada and Sweden all reduced primary lending rates by a half percentage point. Switzerland also cut its benchmark rate, while the Bank of Japan endorsed the moves without changing its rates.
In another monetary first, the Chinese central bank joined the effort — without explicitly saying it was doing so — by reducing its key interest rate and lowering bank reserve requirements to free up cash for lending.
The Fed’s benchmark short-term rate now stands at 1.5 percent. The European Central Bank’s is 3.75 percent.
Taken together with other moves in the United States, Britain and Continental Europe in the last few days, the rate cuts look like part of a broader, global strategy that embraces aggressive use of monetary policy and taxpayer recapitalization of ailing banks, generating cautious optimism among crisis-weary analysts.
“The gravity of the times requires out-of-the box responses,” said Jim O’Neill, the chief global economist at Goldman Sachs. “Atop of all the other things we have seen this week, it gives me great confidence.”
The efforts led to a brief rally on European stock markets, but it quickly fizzled. Benchmark indexes were off by 5 percent to 6 percent in Germany, Britain and France. Markets in New York were trading in a 400-point range, swinging between positive and negative.
Credit market conditions remained extremely tight, with the gap between yields on safe, three-month government securities and the rate that banks charge one another for loans of the same duration rising to more than 4 percentage points not long after the central banks acted — showing financial institutions remained deeply concerned about lending to one another.
Federal Reserve officials said Wednesday’s action was the first time ever that the Fed had coordinated a reduction in interest rates with other central banks, though the United States has periodically joined with other countries to intervene in currency markets to stabilize foreign exchange rates.
The closest thing to a precedent came in November 2001, when the Fed and the European Central Bank announced a rate reduction on the same day. But those actions were nominally independent, and they did not involve any additional foreign central banks.
The cut came despite what had been a divergence of views between the United States and Europe ever since the financial crisis erupted in August 2007. The European Central Bank had been much more reluctant to lower interest rates, because policy makers there tended to see the mortgage meltdown primarily as an American problem with secondary ripple effects in Europe.
But any lingering comfort outside the United States evaporated in the last week, as money markets froze up around the world and major corporations and banks across Europe began suffocating from their inability to do even routine financial transactions.
Making matters worse, none of the epic emergency measures taken in the United States — the passage of a $700 billion bailout plan to buy up distressed securities; a doubling and redoubling of emergency loan facilities at the Fed to $900 billion on Monday; and the Fed’s unprecedented decision on Tuesday to start buying up short-term commercial debt for businesses of all types — had prevented the stock markets from plunging at vertigo-inducing amounts day after day.
Some analysts responded positively to the news.
“At last, a coordinated show of force,” Ian Shepherdson, chief United States economist at High Frequency Economics, wrote in a note. “The move is to be applauded but there is more to come. The playbook to avoid depressions says rates need to be as close to zero as possible.”
Other economists were cautious about whether the various measures would be successful, after previous plans like the United States’ economic bailout have not halted steep declines in share prices.
“There’s no silver bullet for these problems,” said Derek Halpenny, a currency strategist at Bank of Tokyo-Mitsubishi UFJ in London. “But the actions by the Fed on Tuesday, the U.K. government’s bailout plan today and the bit-by-bit approach European governments are taking show the authorities are getting more proactive.”
The central feature of the acute credit crunch, which began in the United States and is now spreading rapidly in Europe, is the reluctance of banks to lend at any rate because they have taken such heavy losses already and are hoarding cash.
Not only does that interrupt the normal flow of credit for activities as basic as modernizing production lines or meeting payrolls, it gums up the normal mechanisms central banks use to ease credit and stimulate economic activity.
“The key lesson is when you face a confidence issue where the market participants no longer trust each other, the conventional macroeconomic tools are not as effective,” Olaf Unteroberdoerster, the International Monetary Fund’s representative in Hong Kong, said Wednesday.
The Sept. 15 bankruptcy filing of Lehman Brothers and subsequent near-failures of European banks drained financial market confidence globally. And whatever the shortcomings, rate cuts do help confidence, even if they have lost their power to spur stock market rallies, analysts said.
In some respects the rate cut was should not have been unexpected. On Tuesday, the chairman of the Federal Reserve, Ben S. Bernanke, had telegraphed such a move. In a speech, he said that the financial turmoil had forced the Fed to downgrade its already gloomy economic outlook and investors had all but assumed that it would lower the benchmark Federal funds rate no later than its next scheduled policy meeting on Oct. 28 and Oct. 29.
Until a few weeks ago, Fed officials had tried to separate its rescue efforts in the financial markets from problems of the underlying economy.
After a rushed series of rate reductions last fall and early this year, bringing the overnight Fed funds rate down to 2 percent in April, the central bank had concentrated its efforts on injecting hundreds of billions of dollars into the financial system to keep banks lending to one another and to their customers. But policy makers held back from further reducing interest rates, which reduce the overall cost of money, because they were worried about rising inflationary pressures.
Consumer prices have climbed sharply, largely because of huge increases in energy and commodity prices. As recently as the Fed’s policy meeting three weeks ago, the central bank’s official position was that its concerns about slowing economic growth were roughly equal to its concerns about rising prices. In reality, many policy makers were more worried about the onset of a recession — which many private economists say has already arrived. But there were still disagreements among members of the Federal Open Market Committee, which sets interest rates.
NYT
Maybe we need to start a new group, the B8. Or the 8 most important central banks.
The action failed to calm gyrating markets, however, amid the growing realization that a serious and prolonged recession may be difficult to avoid.
The Federal Reserve, the European Central Bank, the Bank of England and the central banks of Canada and Sweden all reduced primary lending rates by a half percentage point. Switzerland also cut its benchmark rate, while the Bank of Japan endorsed the moves without changing its rates.
In another monetary first, the Chinese central bank joined the effort — without explicitly saying it was doing so — by reducing its key interest rate and lowering bank reserve requirements to free up cash for lending.
The Fed’s benchmark short-term rate now stands at 1.5 percent. The European Central Bank’s is 3.75 percent.
Taken together with other moves in the United States, Britain and Continental Europe in the last few days, the rate cuts look like part of a broader, global strategy that embraces aggressive use of monetary policy and taxpayer recapitalization of ailing banks, generating cautious optimism among crisis-weary analysts.
“The gravity of the times requires out-of-the box responses,” said Jim O’Neill, the chief global economist at Goldman Sachs. “Atop of all the other things we have seen this week, it gives me great confidence.”
The efforts led to a brief rally on European stock markets, but it quickly fizzled. Benchmark indexes were off by 5 percent to 6 percent in Germany, Britain and France. Markets in New York were trading in a 400-point range, swinging between positive and negative.
Credit market conditions remained extremely tight, with the gap between yields on safe, three-month government securities and the rate that banks charge one another for loans of the same duration rising to more than 4 percentage points not long after the central banks acted — showing financial institutions remained deeply concerned about lending to one another.
Federal Reserve officials said Wednesday’s action was the first time ever that the Fed had coordinated a reduction in interest rates with other central banks, though the United States has periodically joined with other countries to intervene in currency markets to stabilize foreign exchange rates.
The closest thing to a precedent came in November 2001, when the Fed and the European Central Bank announced a rate reduction on the same day. But those actions were nominally independent, and they did not involve any additional foreign central banks.
The cut came despite what had been a divergence of views between the United States and Europe ever since the financial crisis erupted in August 2007. The European Central Bank had been much more reluctant to lower interest rates, because policy makers there tended to see the mortgage meltdown primarily as an American problem with secondary ripple effects in Europe.
But any lingering comfort outside the United States evaporated in the last week, as money markets froze up around the world and major corporations and banks across Europe began suffocating from their inability to do even routine financial transactions.
Making matters worse, none of the epic emergency measures taken in the United States — the passage of a $700 billion bailout plan to buy up distressed securities; a doubling and redoubling of emergency loan facilities at the Fed to $900 billion on Monday; and the Fed’s unprecedented decision on Tuesday to start buying up short-term commercial debt for businesses of all types — had prevented the stock markets from plunging at vertigo-inducing amounts day after day.
Some analysts responded positively to the news.
“At last, a coordinated show of force,” Ian Shepherdson, chief United States economist at High Frequency Economics, wrote in a note. “The move is to be applauded but there is more to come. The playbook to avoid depressions says rates need to be as close to zero as possible.”
Other economists were cautious about whether the various measures would be successful, after previous plans like the United States’ economic bailout have not halted steep declines in share prices.
“There’s no silver bullet for these problems,” said Derek Halpenny, a currency strategist at Bank of Tokyo-Mitsubishi UFJ in London. “But the actions by the Fed on Tuesday, the U.K. government’s bailout plan today and the bit-by-bit approach European governments are taking show the authorities are getting more proactive.”
The central feature of the acute credit crunch, which began in the United States and is now spreading rapidly in Europe, is the reluctance of banks to lend at any rate because they have taken such heavy losses already and are hoarding cash.
Not only does that interrupt the normal flow of credit for activities as basic as modernizing production lines or meeting payrolls, it gums up the normal mechanisms central banks use to ease credit and stimulate economic activity.
“The key lesson is when you face a confidence issue where the market participants no longer trust each other, the conventional macroeconomic tools are not as effective,” Olaf Unteroberdoerster, the International Monetary Fund’s representative in Hong Kong, said Wednesday.
The Sept. 15 bankruptcy filing of Lehman Brothers and subsequent near-failures of European banks drained financial market confidence globally. And whatever the shortcomings, rate cuts do help confidence, even if they have lost their power to spur stock market rallies, analysts said.
In some respects the rate cut was should not have been unexpected. On Tuesday, the chairman of the Federal Reserve, Ben S. Bernanke, had telegraphed such a move. In a speech, he said that the financial turmoil had forced the Fed to downgrade its already gloomy economic outlook and investors had all but assumed that it would lower the benchmark Federal funds rate no later than its next scheduled policy meeting on Oct. 28 and Oct. 29.
Until a few weeks ago, Fed officials had tried to separate its rescue efforts in the financial markets from problems of the underlying economy.
After a rushed series of rate reductions last fall and early this year, bringing the overnight Fed funds rate down to 2 percent in April, the central bank had concentrated its efforts on injecting hundreds of billions of dollars into the financial system to keep banks lending to one another and to their customers. But policy makers held back from further reducing interest rates, which reduce the overall cost of money, because they were worried about rising inflationary pressures.
Consumer prices have climbed sharply, largely because of huge increases in energy and commodity prices. As recently as the Fed’s policy meeting three weeks ago, the central bank’s official position was that its concerns about slowing economic growth were roughly equal to its concerns about rising prices. In reality, many policy makers were more worried about the onset of a recession — which many private economists say has already arrived. But there were still disagreements among members of the Federal Open Market Committee, which sets interest rates.
NYT
Maybe we need to start a new group, the B8. Or the 8 most important central banks.
posted by madtom at 8:30 PM
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