Fed Orders Key Rate Cut, Other Banks Follow
The Federal Reserve, acting in coordination with other global central banking authorities, cut a key U.S. interest rate by half a percentage point Wednesday (Oct. 8) to steady a teetering economy.
The Fed reduced its key rate from 2% to 1.5%, according to an Associated Press report.
In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5%, while the European Central Bank sliced its rate to 3.75%.
Other central banks also taking part include the banks of Canada, Sweden, and Switzerland. China also cut its key interest rates Wednesday for a second time in less than one month to stimulate slowing economic growth amid the global credit crisis.
The action revives the central bank’s rate-cutting campaign which had been halted in June out of concerns that those low rates would worsen inflation. Since then, however, economic and financial conditions have dangerously deteriorated, forcing the Fed to reverse course.
The fact that the Fed felt it couldn’t wait until its regularly scheduled meeting on Oct. 28-29, underscored the urgency of the situation.
“The pace of economic activity has slowed markedly in recent months,” the Fed said “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.”
Although inflation has been high, the Fed believes that the recent drop in energy prices and the weaker prospects for economic activity have reduced this threat to the economy.
The Wednesday cuts come as markets in Asia and Europe sink amid waning confidence, Britain steps in to support banks, and Russia closes its main stock market for two days.
In addition, the Fed reduced its emergency lending rate to banks by half a percentage point to 1.75%. Given the intense credit crisis, banks have been ramping up their borrowing from the Fed’s emergency “discount” window.
In response, the prime lending rate for millions of borrowers will drop by a corresponding amount. The prime rate applies to certain credit cards, home equity lines of credit and other loans.
The hope was to spur nervous consumers and businesses to spend more freely again. They clamped down as housing, credit and financial problems intensified last month, throwing Wall Street into chaos. Many believe the country is on the brink of, or already in, its first recession since 2001.