Global Rate Cuts Fail to Contain Crisis
Thursday, October 9, 2008
The world's central banks launched a dramatic bid Wednesday to contain the financial crisis, simultaneously cutting interest rates in 21 countries. The move sent markets fluctuating as pessimism about the world economy continued to deepen.
So stark are conditions that the International Monetary Fund and other economists now expect the United States to enter a recession this year, with surging unemployment. The slowdown will take "considerable time" to resolve -- years, not months, the IMF said yesterday in its annual World Economic Outlook report.
The IMF and its sister organization, the World Bank, this week will offer policymakers their first chance to meet in person since the near-meltdown in financial markets began last month. They will hold their annual meeting against a backdrop of the most dire financial circumstances in generations.
Yesterday alone, authorities in London, the world's banking capital, partly nationalized many of the world's biggest banks and ordered the liquidation of others. The stock market in Japan, the world's second-largest economy, fell 9.4 percent in a single day. U.S. officials pleaded with markets for patience, saying it has the tools to repair confidence among financial institutions.
Treasury officials said the government now has the tools it needs to address the crisis, but officials are continuing to develop plans for new measures if financial markets continue to disintegrate. One of several options under consideration is taking ownership stakes in troubled banks.
And all of that occurred as the world's central banks moved, in an unprecedented global measure, to lower interest rates. Lower rates generally make borrowing cheaper and boost the economy, thus giving a lift to stock prices. But yesterday the effect on markets was fleeting.
The Dow Jones industrial average fluctuated throughout the day before closing down 189.01 points, or 2 percent. European markets were down more sharply, reflecting negative developments after they had closed Tuesday. The British stock market was down 5.2 percent.
Nonetheless, the rate cuts were a vivid show of force, indicating both the global scope of the crisis and the urgency with which economic policymakers around the world are seeking to act together.
The Federal Reserve cut the short-term interest rate it controls by half a percentage point, as did the European Central Bank and monetary policy authorities in Canada, Switzerland and Sweden. The Bank of Japan endorsed the action, and the Chinese central bank made a smaller rate cut of its own. Early today, central banks in South Korea, Taiwan and Hong Kong followed with their own interest rate cuts.
The Fed and European Central Bank jointly cut rates after the Sept. 11, 2001, terrorist attacks, but never have so many of the world's monetary policymakers acted in concert. China rarely joins the West in coordinating economic policy.
"We're all very much in the same boat here," said Ethan Harris, a managing director and economist at Barclays Capital. "The markets have been begging for some sign that policymakers understand the global nature of the crisis, and this was it."
Although stock markets fell, there were some signs that credit markets were improving, even if they remain deeply strained overall. For example, prices for U.S. government bonds fell, suggesting that investors were less fearful and thus less inclined to pour money into those ultra-safe investments.