Fed, Central Banks Cut Rates

The Federal Reserve has cut its key rate from 2 percent to 1.5 percent. The response, an effort to stem mounting losses in the markets around the world, is part of a move that includes similar efforts by other central banks, according to news sources. The Bank of England cut its rate by half a point to 4.5 percent and the European Central Bank its rate by half a point to 3.75 percent. Other central banks in China, Canada, Sweden, and Switzerland have done likewise.”The recent intensification of the financial crisis has augmented the downside risks to growth,” the Fed said in a statement. The impact is immediate on the prime interest rate, reducing it to 4.5 percent. This rate move comes on the heels of another effort by the Fed to stem the crisis in markets. As reported by CPN yesterday, the Fed announced that it will step into a new area, buying unsecured commercial paper, and the finance ministers of the European Union appeared poised to finally coordinate their initiatives. Also yesterday, chairman Ben Bernanke (pictured) told the National Association for Business Economics that “the outlook for economic growth has worsened,” and that a cut was likely.In response to these recent Fed moves, Raymond Torto, global chief Economist at CB Richard Ellis Inc. said this morning,  “This week has witnessed two significant and positive actions by the Federal Reserve—the program announced Tuesday to buy commercial paper directly from business to unlock the short-term money market and today’s interest rate cut. Today’s Fed action was coordinated with the world’s central banks, which is a sign that monetary authorities across the globe are on the same policy page and are working together effectively.”The Fed statement, released at 7 A.M. today, described its reasoning and its role in coordinating the global effort. It stated that it could afford to cut the rate because,  “inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability.”It noted that the downside risk to growth warranted “easing of global monetary conditions.” Data coming into the Fed, it stated, showed a marked slowdown of economic activity in recent months. That combined with “market turmoil” led to the move. In a related action, the Fed board of governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent.