Federal Reserve orders emergency rate cut to 1.5%
The Fed lowers its benchmark federal funds rate by half a percentage point. It joins five other nations' central banks in cutting rates. Britain announces a bailout of its banking system.
WASHINGTON — The Federal Reserve and five other central banks slashed their key interest rates this morning, hoping to jolt petrified global credit markets back to life.
The emergency move came hours after Britain announced a massive bailout of its financial system, saying it would shore up and partially nationalize shaky banks by buying preferred stock, guaranteeing bonds and infusing the monetary system with new cash.
The central banks "have to try everything they can at this point in the crisis," said Nigel Gault, chief U.S. economist at Global Insight, an economic forecasting firm in Lexington, Mass. "Rate cuts are not a cure-all, but you have to do it. And it's important that this is done globally because this is a global crisis."
The Fed lowered its benchmark federal funds rate by half a percentage point, to 1.5% -- the lowest level since 2004. Until earlier this year, the central bank had been raising rates, seeking to snuff out signs of inflation.
The stock markets dropped sharply in the opening minutes of trading before recovering and making slight gains, then dipping again. At about 8 a.m. PDT, The Dow industrials, which had already lost nearly 900 points so far this week, was down more than 70 points from Tuesday's close.
It was the first change in interest rates since April, when the Fed's concerns about rising inflation gave way to worry about slowing economic growth and the possibility of recession. The Fed's rate-setting committee had not been scheduled to meet until Oct. 28.
"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 banks of the United States, Europe, Britain, Canada, Switzerland and Sweden said in a rare joint statement. "Some easing of global monetary conditions is therefore warranted."
The Bank of Japan, whose interest rates are already near zero, expressed its support. China's central bank also cut rates, although it did not participate in the joint statement of policy.
Cutting rates in coordination means the central banks can encourage new lending between banks around the world without risking that the banks will move their capital to countries who keep their rates at relatively higher levels.
