Thursday, October 9, 2008

Fed and Other Central Banks Across Globe Cut Key Rates

Working to stem a global financial crisis, the Federal Reserve reduced the benchmark federal funds rate by 50 basis points as other central banking authorities around the world enacted similar cuts in a coordinated effort to stimulate economic growth.

The Fed reduced its key rate from 2% to 1.5% as the Bank of England cut its rate from 5% to 4.5% and the European Central Bank dropped its rate to 3.75%.

Other central banks participating in the global effort include the central banks of Canada, China, Sweden, and Switzerland.

With the rapid deterioration of the U.S. financial markets, the Federal Reserve decided it could not wait until its regularly scheduled meeting on Oct. 28-29 to take action.

''The pace of economic activity has slowed markedly in recent months,'' the Fed indicated in a statement accompanying the rate cut.

''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.''

The Fed’s action restarts the central bank's rate-cutting campaign which had been frozen in June due to concerns that those low rates would cause inflation to get worse.

The last time the Fed’s cut rates was at the end of April, capping one of the most powerful rate-cutting campaigns in decades as it scrambled to shore up the uncertain economy.

Energy prices have recoiled from record highs attained in mid-July over the past few months, allowing the Fed to have more freedom to lower rates again.

In return, the prime lending rate for millions of borrowers will decrease by a related amount on mortgages, home equity lines of credit, credit cards and other loans.

Additionally, the Fed lowered its emergency lending rate to banks by half a percentage point to 1.75%.

The Fed increased a short-term loan program on Monday to as much as $900 billion by the end of 2008 — far above even the government's bailout plan of $700 billion passed on Friday.

The next day the Fed proclaimed that it will purchase enormous amounts of corporate debt, even some of it unsecured, in hopes of replenishing the flow of money in so-called commercial paper markets.

That is where many companies turn for short-term loans to finance their most basic day-to-day operations

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