Fed, European Banks Coordinate Interest Rate Cut
Share prices in Europe rose immediately after the announcement, but fell back again in later trading. U.S. stocks opened lower despite the rate cut: The Dow Jones industrial average was down 71.76 points, or 0.76 percent. The Standard & Poor’s 500 Index was down 1.27 percent, and the Nasdaq fell 1.33 percent in early trading.
The Fed lowered the target federal funds rate from 2 percent to 1.5 percent. The European Central Bank cut its benchmark rate from 4.25 percent to 3.75 percent. Central banks in Canada, England, Sweden and Switzerland also joined the rate cut.
“The committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures,” the Fed said in a statement.
The European Central Bank had been reluctant to cut rates only a week ago, according to the Washington Post, fearing that it would exacerbate inflation. But the central bank joined the other banks in a statement today, saying that “the recent intensification of the financial crisis has augmented the downside risks to growth.”
Recent efforts to address the financial crisis, such as the $700 billion financial rescue plan passed by Congress last week, have failed to fully buoy jittery investors. The interest rate cut more directly tries to address the recent credit freeze and resulting economic slowdown. Lower interest rates make it cheaper for both businesses and consumers to borrow money.
Many economists applauded the banks coordinated actions, but said that they were still only the beginning of what will need to be done to address the crisis.
“Central banks of the world have finally woken up to the gravity of the current situation,” Charles Diebel, head of European rates strategy at Nomura International Plc in London, told Bloomberg news. “It is potentially not the last we will see of central bank activity particularly in Europe as the macro situation is still weakening dramatically.”