Fed slashes rates, but Wall Street still tumbles
JEANNINE AVERSA ASSOCIATED PRESS - Oct 9, 2008
WASHINGTON (AP) - Even an orchestrated round of rate cuts by the world's central banks was not enough to stem the bleeding on Wall Street.
The Federal Reserve, desperately trying to jump-start the lending that keeps the U.S. economy moving, on Wednesday dropped its closely watched federal funds rate to 1.5 percent. The cut from 2 percent took the rate to its lowest level in more than four years.
In an unprecedented coordinated move, central banks in England, China, Canada, Sweden and Switzerland and the European Central Bank also cut rates after a series of high-stakes phone calls over several days between Fed Chairman Ben Bernanke and his counterparts.
On Thursday, rates in South Korea, Hong Kong and Taiwan were also trimmed and Asian markets appeared to find their feet after a brutal round of selling Wednesday.
In Tokyo, the benchmark Nikkei 225 index ended morning trading up 1.25 percent, a day after it plummeted 9.4 percent in its biggest one-day drop in 21-years. Hong Kong's Hang Seng Index gained 1.2 percent following the interest rate cut, while China's benchmark Shanghai Composite Index had gained 0.8 percent by late morning.
Wall Street stocks spent most of Wednesday afternoon in positive ground but succumbed to investor fears over the state of the economy in the session's waning minutes.
The Dow Jones industrial average lost 189 points, or 2 percent, to close at 9,258. It was the sixth straight day of losses for the Dow. The index has shed more than a third of its value, nearly 5,000 points, since its all-time high, set one year ago Thursday.
The day's losses were lighter for the Nasdaq composite index and the Standard & Poor's 500.
The Fed acted in concert with the European Central Bank to make emergency interest rate cuts after the Sept. 11 terror attacks in 2001. But Wednesday's cuts were unprecedented with the number of nations that participated, the Fed said.
For millions of Americans, the Fed's cut means borrowing money becomes cheaper. Home equity loans, credit cards and other floating-rate loans all fluctuate depending on what the Fed does.
Bank of America, Wells Fargo and other banks cut their prime rate by half a point to 4.5 percent, also the lowest in more than four years, after the Fed announced its decision early Wednesday.
Fed watchers believe the central bank might cut rates further when it meets later this month, and perhaps again in December, in hopes of cushioning the blow if the United States falls into recession.
"Even if the financial crisis was put to bed today, that would still leave the economy in a probable recession," said economist Ken Mayland, president of ClearView Economics.
One day after a presidential debate that focused heavily on the economy, both major candidates embraced the decision. Both Democrat Barack Obama and Republican John McCain described the crisis as global.
The White House welcomed the cooperation among central banks to battle the crisis. "It's important and helpful that central banks are working in a coordinated way to deal with stress in the financial system," spokesman Tony Fratto said.
Even the coordinated action may not break the panicky mindset that has gripped investors across the world as jobs evaporate and retirement savings dry up. Banks may still be inclined to hoard cash, and until they decide to lend again the crisis is not likely to let up.
If anyone needed evidence, major American retailers turned in dismal sales figures for the third quarter _ further proof that consumer spending, the lifeblood of the economy, is sputtering.
"The turmoil will not end quickly and significant challenges remain ahead," Treasury Secretary Henry Paulson told reporters at a preview of meetings later this week of the finance officials of the Group of Seven major industrial countries, the 185-nation International Monetary Fund and the World Bank. The global credit crisis was expected to be the major agenda item at those talks.
In Britain, the government said it would pour cash into troubled banks in exchange for stakes in them _ a partial nationalization.
"This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," said Britain's Prime Minister Gordon Brown.
An administration official said late Wednesday that the Bush administration is also considering taking ownership stakes in a number of U.S. banks as one option it might use to deal with a serious credit crisis.
This official, who spoke on condition of anonymity because no decision has been made, said the $700 billion rescue package passed by Congress last week allows the Treasury Department to inject fresh capital into financial institutions and get ownership shares in return.
The Fed's interest rate cut was a change in course. It had held rates steady because of inflation concerns. Since the Fed had put a stop to interest-rate cuts in June, the economic outlook has deteriorated.
"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 running higher, the Fed believes the recent drop in prices for oil and gas, and the weaker prospects for economic activity, have reduced the threat it poses to the economy.
The credit markets, which have been remarkably tight for weeks, showed only small signs of loosening. Rates on commercial paper, the short-term debt companies issue to raise cash for everyday expenses, went down. But the rate banks charge each other for loans went up.
The Fed also reduced its emergency lending rate to banks by half a percentage point, to 1.75 percent. Given the intense credit crisis, banks have been borrowing more under what is known as the discount window.
Associated Press writers Martin Crutsinger in Washington, Joe Bel Bruno and Anne D'Innocenzio in New York and Pan Pylas in London contributed to this report.