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Central Banks Show Unprecedented Unity in Coordinated Rate Cuts

What has now become a global crisis seems to require a coordinated global solution.  The Fed had kept its benchmark federal funds rate unchanged at 2.00% since April and in an unscheduled move, in conjunction with Central Banks around the world, dropped this key rate half a percent to 1.50%.  This action should cut borrowing costs for consumers almost immediately as the major U.S. banks have followed suit by slashing their prime lending rate half a percent to 4.50% to benefit their floating rate customers.  The Fed may have hoped to wait it out longer but the rapidly deteriorating economy was not going to cooperate in allowing them to hold off before making another move.  The continually expanding credit crisis forced Fed officials to act sooner rather than later in lowering borrowing costs, even pre-empting a move at its next scheduled FOMC meeting on October 28th-29th.  The snowballing crisis in the financial markets has brought the risks assaulting economic growth to the forefront and placed the risks to price stability and inflation squarely behind it.  Current economic data revealed that the rate of economic activity had slowed sharply in recent months as the financial crisis has amplified and spread globally, adding pressures which further dampen spending.  The Fed may have concluded the only way out of this economic catch-22 may be to cut rates as close to zero as possible and to funnel money into the banking system as quickly as possible while encouraging government spending.

The European Bank along with the Banks of England, Canada and Sweden also cut their key lending rates by half a percent.  China and Switzerland also participated in the cuts and The Bank of Japan issued a statement of support for the coordinated effort.  Global policymakers sought to join forces in unlocking the credit markets after the premium on the 3 month LIBOR (London Interbank Offered Rate) doubled to a record high recently, the LIBOR rate is used to calculate a variety of loan rates including mortgage, auto and student loans.  This global rate cutting news was welcomed by the financial markets initially and then markets turned south as there was speculation that the move perhaps should have been even greater while some market indices have recently closed at their lowest level in five years.  It is forecast that the Fed may also find the need to make another half point cut at its next FOMC meeting at the end of the month.  

Fed Cuts Rate in Efforts to Ease Credit Crunch, Help Borrowers, 10-08-2008

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