Interest Rate Reduction Goes Global
Wednesday, October 08, 2008SUSIE GHARIB: An unprecedented interest rate cut today, coordinated by the Federal Reserve and five other central banks around the world. Each lowered their key rate by half of a percent in an effort to encourage financial institutions to lend money to businesses and consumers. Here in the U.S., the Federal funds rate now stands at 1.5 percent. The reaction on Wall Street: extreme volatility. Stocks whipsawed all day, with the Dow shifting several times between triple-digit gains and triple- digit losses. By the closing bell, the Dow lost 189 points and the NASDAQ fell 14.50. We have two reports looking at the historic global rate cut and whether that dramatic action will restore investor confidence. We begin with Stephanie Dhue in Washington.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: U.S. Treasury Secretary Henry Paulson welcomed today's coordinated rate cut, and says world leaders must continue to boost liquidity and strengthen financial institutions.
HENRY PAULSON, TREASURY SECRETARY: I think you're going to have different policies. But the key thing is that we continue to work closely together, we continue to communicate, we continue to coordinate.
DHUE: The U.S. Federal Reserve, the European Central Bank, Bank of Canada, Bank of England, Central Bank of Sweden, and the Swiss National Bank, all reduced interest rates. The Bank of Japan supported the policy action, but its rate is already near zero. International Monetary Fund chief economist Olivier Blanchard says the results won't be immediate.
OLIVIER BLANCHARD, CHIEF ECONOMIST, INTERNATIONAL MONETARY FUND: But even once such concerted action is taken, the effects will take time, and it is clear that there will be tough economic times ahead.
DHUE: Already the U.S. has passed $700 billion package to buy troubled assets, guaranteed money market funds, taken over Fannie Mae (FNM) and Freddie Mac (FRE), and driven down mortgage rates, and pumped money into the commercial paper market. European countries have increased deposit insurance for banks and in some cases nationalized them. G-7 finance ministers will be meeting in Washington, D.C., this weekend. Economist Fred Bergsten says they should seize the opportunity to take additional steps to restore confidence.
FRED BERGSTEN, DIRECTOR, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS: If world's finance ministers came to Washington and went away without having taken further action, it would be almost as if the Congress had gone home without passing a rescue package and would be both a huge missed opportunity and risking a further downward spiral in the confidence crisis.
DHUE: The IMF estimates that an economic recovery could take place in 2009. But others question whether our consumption-based economy can recover that quickly. Investment manager Rob Dugger says a recovery could take a decade.
ROB DUGGER, PARTNERSHIP FOR AMERICA'S ECONOMIC SUCCESS: If the problems are longer term and the roots historically extend over decades, we should expect to see the turmoil in financial markets continue as one after another of the deep dimensions of our problems become evident.
DHUE: Analysts say world leaders working together increases the odds of reaching a solution to the financial crisis that works. But when asked when a recovery might take hold, Treasury Secretary Paulson declined to give a forecast. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Suzanne Pratt. You would think the rare synchronized slashing of rates would soothe Wall Street as well as global stock markets. But the central bank moves did little to stem the selling or build investor confidence. U.S. stocks fell for the sixth straight day, while many overseas markets, including Japan, Hong Kong, France, and the U.K., logged big losses. Wachovia Securities strategist Scott Wren said the U.S. response was muted because investors expected the global rate cuts, and are looking for additional action.
SCOTT WREN, SENIOR EQUITY STRATEGIST, WACHOVIA SECURITIES: We've been very volatile. I think it's all about uncertainty, it's all about confidence. And I think that the Federal Reserve and these other central banks, while they've done a lot to provide liquidity to the system, there are some more things that they probably need to do.
PRATT: So what will it take to put a hardwood floor under equity prices? Further cuts in short-term rates are a given for most market experts. But Wachovia's Wren says at the top of his wish list is the hope that central banks soon act as intermediaries in the LIBOR market, which he says will go a long way in unclogging credit markets.
WREN: I would like to see the central banks -- a combination of central banks, mainly the Federal Reserve, the European Central Bank, and the Bank of England, come in here and guarantee these LIBOR bank-to-bank trades. I think that's very important.
PRATT: Frozen credit remains the primary worry for equity investors. And while some credit market participants see small signs of thawing, the overwhelming consensus is that the process will take time. Fixed income expert Ira Jersey says all investors need to be more patient.
IRA JERSEY, FIXED INCOME STRATEGIST, CREDIT SUISSE: Time is the only thing that winds up healing these wounds and unfortunately that time -- the time frame that it's going to take is unpalatable to a lot of people because it can take many quarters, if not years, in order to alleviate the backlog and the risk aversion that is currently built up in the financial system.
PRATT: In the last eight trading sessions, the Dow has lost nearly 2,000 points, or 17 percent of its value. While it may take time to regain investor confidence, it may also take time to regain that lost ground. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
