Fed leads round of global interest rate cuts

In Asia, Japan’s Nikkei 225 closed 9.38 percent lower and Hong Kong’s Hang Seng tumbled 8.17 percent hours before the rate cuts were announced; their declines showed the extent of the worldwide gloom.

The worldwide gloom followed a sell-off in U.S. markets late Tuesday, where major stock indexes slid 5 percent. The rout brought the Dow Jones industrials to its lowest close in five years. The blue chip index is now around 33 percent below its record close of 14,164.53 a year ago.

The Fed’s action Wednesday was the latest in a long series of moves over the last several weeks that the central bank has taken in coordination with other federal agencies, Congress and the White House to shore up a financial industry stung by bad loans, mounting losses and — in many cases — collapse. President Bush signed the financial bailout bill into law on Friday.

The Fed’s action reversed its current policy on interest rates, which had been to hold them steady out of concern that more cuts would fuel inflation. Since Fed Chairman Ben Bernanke and his colleagues put a stop to interest-rate cuts in June, economic and financial conditions have deteriorated significantly.

“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 high, the Fed believes the recent drop in energy prices and the weaker prospects for economic activity have reduced this threat to the economy.

The orchestrated rate reductions had a mixed impact on stressed credit markets. Rates dipped on some commercial paper, a crucial short-term financing mechanism that many businesses rely on to bankroll day-to-day operations. The important “Libor” rate, which affects a vast array of loans, remained high, however.

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 ramping up their borrowing from the Fed’s emergency “discount” window.

The fact that the Fed felt it couldn’t wait until its regularly scheduled meeting on Oct. 28-29, underscored the urgency of the situation.

One of the goals of the coordinated rate cuts is to spur nervous consumers and businesses to spend more freely again. They clamped down as housing, credit and financial problems intensified last month, throwing Wall Street into chaos. Many believe the United States is on the brink of, or already in, its first recession since 2001, one that could quickly spread to other countries around the globe.

It can take months before rate cuts work their way through the financial system, however, and the economy has pressing problems now. Major U.S. retailers turned in dismal reports of third quarter sales, a dire omen for the all-important holiday shopping season. Consumer spending accounts for more than two-thirds of the nation’s economic activity.

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The Fed’s last rate cut was in late April, capping one of the most aggressive rate-cutting campaigns in decades as it scrambled to shore up the faltering economy. After that, the Fed moved to the sidelines, holding rates steady as zooming food and energy prices during that period threatened to ignite inflation. In the past few months, energy prices have retreated from record highs reached in mid-July, giving the Fed more leeway to drop rates again.

At its last meeting in September, the Fed struck a more dire tone about the economy, hinting that a rate reduction once again could be in the offing.

Even with the unprecedented $700 billion financial bailout plan, the failing economy and the jobs market probably will get worse. Many believe the economy will jolt into reverse later this year — if it hasn’t already— and will stay sickly well into next year.

Mounting job losses, shrinking paychecks, shriveling nest eggs and rising foreclosures all have weighed heavily on American voters, who will be electing a new president in about four weeks. The economy is their No. 1 concern, polls have shown.

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