Global Central Banks Intervene; Fed Cuts Interest Rates

Central banks around the world intervened early Wednesday morning with a concerted effort to stop the massive sell-off taking place on global stock markets. In the U.S., the Federal Reserve cut its key interest rate to 1.5 percent from 2 percent. Meanwhile, British regulators launched an $87 billion bank rescue operation that involves nationalizing parts of some banks in the U.K.

The half-percentage point cut in the federal funds rate is the largest cut since March 18 and the first cut since April, following a series of planned interest rate reductions. It’s the second time this year the Fed has cut rates between scheduled meetings of the committee that determines the interest rate.

The Fed also said that it is prepared to take more action as needed.

"The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability," the Fed said in a statement.

The Fed was joined by the central banks of Canada, England, Sweden, Switzerland, and the European Union. China’s central bank cut its interest rates independent of the joint action. The Bank of Japan also intervened in its stock market, as it has for the past 12 days. The Japanese stock exchange fell nearly 10 percent in trading Wednesday before the coordinated effort was announced.

The U.K. government also announced Wednesday that it is launching a rescue plan for the banks under its watch. The Treasury will pump up to 50 billion pounds ($87 billion) into troubled financial institutions. Part of the plan involves exchanging equity in the private banks for the bailout funds.

Large British banks RBS and Barclays both indicated they would participate in the plan.

The rate cut in the U.S. was signaled Tuesday when Fed Chairman Ben Bernanke spoke at the National Association for Business Economics annual meeting in Washington. There, he mentioned the possibility for an interest rate cut on or before the Fed’s scheduled two-day meeting to determine interest rates on Oct. 28-29.

In his speech, Bernanke said that the economy is weak, economic growth has worsened and downside growth risks have increased.

U.S. stocks plunged after his comments, ending the day down more than 500 points.

“It was no big deal, almost a disappointment that he didn’t say anything stronger,” Dan North, senior economist at trade credit insurer Euler Hermes, told insideARM. “I suspect that is why the markets reacted negatively. The markets were expecting to hear what they heard and were disappointed that there wasn’t something better, something more in his statement.”

Wall Street was waiting for definitive news of a rate cut, which came Wednesday morning. Stock futures were down as many as 200 points early Wednesday, but then immediately pivoted and soared on the news of the concerted global effort.

Still, North doesn’t believe that an interest rate cut will help. He thinks that the one thing lacking in the credit market is confidence.

“Lowering the federal funds rate and making hundreds of billions of dollars available hasn’t eased the credit crunch, instead what’s needed is an injection of confidence,” said North. “Lenders and banks need confidence to know that they can lend to each other and still get their money back.”