Fed leads round of global interest rate cuts

updated 4:36 p.m. ET Oct. 8, 2008

WASHINGTON - In a rare coordinated move, the Federal Reserve and other major central banks from around the world slashed interest rates Wednesday to prevent a mushrooming financial crisis from becoming a global economic meltdown.

The decision sent Wall Street on a roller coaster ride. The major indexes moved in and out of positive territory, with the Dow Jones industrials at times falling more than 200 points or rising more than 100.

Overseas markets tumbled on worries that the move wouldn’t immediately help ease the pain from the financial crisis.

The Fed reduced its key rate from 2 percent to 1.5 percent. In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent and the European Central Bank sliced its rate by half a point to 3.75 percent.

The central banks of China, Canada, Sweden, and Switzerland also cut rates. The Bank of Japan said it strongly supported the actions.

“The recent intensification of the financial crisis has augmented the downside risks to growth,” the Fed said in explaining the coordinated action, the latest in a series of bold moves meant to pry open tight lending and revive the global economy.

The Dow Jones industrials, already down 875 points this week, rose 85 points in afternoon trading.

Treasury Secretary Henry Paulson said Wednesday that global financial markets remain severely strained, underscoring the need for quick action to implement the government’s $700 billion rescue program.

The Fed’s action will reduce borrowing costs almost immediately for U.S. bank customers whose home equity and other floating-rate loans are tied to the prime interest rate. Bank of America, Wells Fargo and other banks cut their prime rate by half a point to 4.5 percent after the Fed announcement.

White House spokesman Tony Fratto welcomed the cooperation among the Fed and other countries’ 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,” Fratto said.

House Speaker Nancy Pelosi, who was in Denver Wednesday to tour a hospital, also praised the decision. But she said Congress may need to go back into session to pass another economic stimulus package worth about $150 billion.

The first economic plan this year cost $168 billion and sent tax rebate checks to most individuals and couples and awarded tax breaks to businesses.

The House did pass a $61 billion economic aid proposal last month before lawmakers left Capitol Hill ahead of the Nov. 4 election. But a similar plan failed to pass the Senate.

The country’s presidential contenders also embraced the action. “This is a global crisis that requires a global solution,” said Democrat Barack Obama. Republican rival John McCain hoped it would contain the “financial crisis spreading across the globe.”

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Some analysts were skeptical that the coordinated rate reductions would do much to turn things around.

“At first blush, while this is a big step, it is unlikely to prove sufficient to stem the rot. Additional rate cuts are likely and further measures to inject liquidity and re-capitalize banks are needed,” said Marc Chandler, global head of currency strategy at the investment firm Brown Brothers Harriman.

The rate cuts came against a backdrop of increasing anxiety in global financial markets. Investors have been fleeing shares on worries that neither the Fed, nor other central banks, could move fast enough to stop the rising turmoil.

European indexes fell. In Britain, the FTSE-100 fell 5.2 percent, Germany’s DAX dropped 5.9 percent, and France’s CAC-40 dropped 6.3 percent.

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