Inflation worries were thrown aside as interest rates were cut on Wednesday in a synchronized multi-country response to try to stabilize world financial markets and ease out of the global credit crunch.
Less than a day after Fed chairman Ben Bernanke hinted a rate cut could be in the works, an unscheduled emergency announcement was made by the Federal Open Market Committee (FOMC) to lower its target for the benchmark federal funds rate 50 basis points to 1-1/2 percent. In a coordinated effort, the European Central Bank, China, Britain, Canada, Sweden and Switzerland also cut rates.
The following was released in a joint statement by the central banks:
"Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.
Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.
Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions."
The FOMC statement added:
"Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. 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. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation."
Bloomberg quoted European Central Bank council member Ewald Nowotny as saying,
"Inflation, but also growth prospects, have come down significantly, and that allowed central banks to carry out this coordinated action. This should send a clear signal to market participants and should help calm markets."
In response to the cuts, the Dow Jones Industrial Average initially dropped more than 200 points. It has since settled.
In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent. In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston.