Coordinated Central Bank Rate Cuts Stem Equity Rout

The Federal Reserve, ECB, Bank of England, Sweden’s Risbank, and Bank of Canada all made rate cuts, each of a half a percent; China cut its benchmark rate by 0.27%. The move pared substantial losses in foreign equity markets (the FTSE, which also benefited from a capital injection into stressed banks) is up slightly, and Dow and S&P futures are currently up, the Dow roughly 100 points.

Note that this action left the Fed with some, but not much, firepower. 1% was as low as it went in the last rate cut cycle, and the Fed is probably unwilling to cut beyond that for fear of winding up in Japan style zero interest rate territory.

From Bloomberg:

The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.

The Fed, ECB, Bank of England, Bank of Canada and Sweden’s Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn’t participate in the move, said it supported the action. Switzerland also took part. Separately, China’s central bank lowered its key one-year lending rate by 0.27 percentage point….

“Central banks of the world have finally woken up to the gravity of the current situation,” Charles Diebel, head of European rates strategy at Nomura International Plc in London, wrote in a note. “It is not potentially not the last we will see of central bank activity particularly in Europe as the macro situation is still weakening dramatically.”

The Fed reduced its benchmark rate to 1.5 percent. The ECB’s main rate is now 3.75 percent; Canada’s fell to 2.5 percent; the U.K.’s rate dropped to 4.5 percent; and Sweden’s rate declined to 4.25 percent. China cut interest rates for the second time in three weeks, reducing the main rate to 6.93 percent.

Here is the text of the Fed’s statement.

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  1. Mikkel

    I know in theory why this helps, but I fail to see how it’s going to help. The TED spread as I type is now up to 4% and GE (!!) even is sounding quite alarmed about its ability to roll over its commercial paper.

    Since they have thrown so much money into short term liquidity and all the credit markets still are seized up, how will a minor rate cut unfreeze them?

  2. Liquidity Trap

    Ahhh… I love the smell of the Global Central Bankers in Panic mode.

    It smells like… Meltdown.

  3. Dean

    Apparently the markets expected a 75 bp rate cut; the dissapointment shows in the futures for Dow Jones, S&P 500 and Nasdaq which look ugly in pre-market opening.

  4. Anonymous

    The market heading to new lows as I write; the central banks have shown themselves impotent to stop the rout. It’s over. May God have mercy on our souls.

  5. Dean

    Keep in mind that generally speaking I do not enjoy debating myself, however, I wonder whether looking at the financial market reaction is the right place for signs of recovery. The crisis is in the credit markets and as Mikkel mentioned above perhaps the TED spread is a more reliable indicator?

  6. Anonymous

    Haven’t we played this game before?

    This by the way is where it got us!!! So from the Maestro…

    ‘Fool me once, shame on — shame on you. Fool me — you can’t get fooled again’

  7. wintermute

    The starting gun is fired and the race to the bottom is in earnest. The winner is the currency you will need the most of to buy an ounce of aurum.

  8. Matt Dubuque

    I apologize for the length of this post.

    I’m not at all bullish here, but I would differ with the statement that the Fed is running out of policy options.

    The Vice President of the KC Federal Reserve, Gordon Sellon, wrote a paper a few years back on what the Fed could do if the Fed funds rate approached zero:

    It is at the bottom of the link below and is titled: “Monetary Policy nd the Zero Bound: Policy Options When Short-Term Rates Reach Zero”

    For starters, the Fed could revert to targeting the monetary base instead of Fed funds. This would have obvious side effects (such as increased volatility in fed funds) but it is an option.

    Secondly, Sellon mentions a reprise of Operation Twist, where the Fed SELLS very short term maturity Treasury paper and BUYS longer term paper. This would help (but not be a panacea) the markets to take a longer time horizon.

    Thirdly, the Fed could jawbone banks and actors to commence lending. The Fed is lending quite a bit after all and are doing their job. Now it is time for the banks to do their part.

    However Volcker was much better at jawboning than Bernanke ever will be. Unfortunate.

    Additionally, as Bernanke indicated yesterday, the Fed can signal its intentions by adjusting the spread between how much interest they are now paying on REQUIRED reserves vs. how much they pay on EXCESS reserves held at the Fed.

    Also, selling some call options on their Treasury holdings has some interesting possibilities not understood (as near as I can tell) in the blogosphere.

    I recommend that people study the Sellon article cited above. It is a classic in this area of the literature.

    But there is, without doubt, only so much the Fed can do.

    This will clearly be a painful adjustment. Ohmae recently used the term “extreme sacrifice” when describing what the US must undergo.

    Matt Dubuque

  9. Darel

    Note that the 50bp cut by the Fed does nothing for actual interest rates. While the federal funds target has been 2.0%, the effective federal funds rate has averaged 1.4% over the last two weeks as the Fed has pumped liquidity into the US and global financial sectors. Quite frankly, Bernanke had lost control of monetary policy.

    In his speech yesterday, the Fed chair argued that paying interest on Fed deposits will restore that power. Data from this week suggests some restoration of the Fed’s ability to hit the target.

    But the upshot is that we’ve been at 1.5% for two weeks already. Today’s cut is for psychological purposes. Look for another cut at the end of the month.

  10. Anonymous


    So what is the point?

    And what pray tell will/does 0% signal? Perhaps Ohmae is telling you?

    Last but not least what happens to 0% financing?

  11. aw70

    Right, the stock markets continue to head south today, even though rates have been cut.

    Does this mean the end of the world?

    Nope, not necessarily. The readers of this blog should know better than to predict Ultimate Gloom because this coordinated and sensible measure has failed to stop a strongly irrational market downdraft in short order (the “irrational” applies to the size of the drop, not the drop itself – that was expected, and makes sense).

    Time will tell whether we are really in for a meltdown, but personally, I would NOT base any such predictions on the performance of the stock markets. These markets are run by and for the very individuals that have gotten us into this mess – compulsive gamblers, the lot of them.

    And the world financial markets do NOT solely consist of the stock exchanges, and are not directly dependent on them for liquidity. Sure, knock-on effects can cause huge amounts of damage to the rest of the economy, but I as I said, I’d be hesitant to assume a complete crash just because stocks have been seriously tanking for some days in a row. A lot of people and institutions have lost a lot of money, but this does NOT mean that everyone will be going bust in short order.

    Especially since the very noticeable preludes to this drama have made a lot of people acutely aware of the possibility of such a market frenzy, and many will have taken precautions.

    Just my two cents


  12. Liquidity Trap

    No, its not the end of the world as we know it. It is a return to fundamentals based Investing, but not for a while, yet.

    It is the end of silly speculative capital endlessly leveraging in exotic derivatives.

    The use of CDS to trade, not to actually insure, is a large part of the great unwind we are now experiencing. The settlement auctions will help to cleanse the system once the losses are know. Other swaps will still need to be reduced.

    The notion of risk-less trades based upon exotic derivatives was is and will be a thing of the past.

    Next, further transparency of financial institution _Assets_, a.k.a. _Loans_ will be required. Moves to remove mark-to-market accounting are counter productive in the face of lack trust. Greater transparency in the form of enhanced _modeling_ disclosure should be required.

    The inter-market funds slosh, carry trades and leveraged speculative finance, ala Doug Noland, are the drivers affecting the equity markets, debt markets and currency markets.

    All in my opinion, of course.

    (But what do I know, I’m just a trader and analyst for a hedge fund, and we are up month to date and year to date. And we use no leverage…)

  13. tasha

    Hello to all. I found this site on the day the Bailout Bill was proposed. You all seem to be the sanest group I’ve encountered on the internet and I have a few questions for you, if you don’t mind. My story–I’m a “regular person”, product of the US public school system therefore no education whatsoever in finances/economics. I took Econ 101 and 102 in college, a subject I found dry to begin with. My lecturer was an Indian grad assistant who spoke with an extremely heavy accent. I vaguely recall a lot of talk of “goons and bootair” but little else. I’m trying to educate myself now and found the Paul Grignon video “Money as Debt”, which I found extremely enlightening as well as frightening, given that all my previous knowledge regarding money was paltry and my assumptions completely false. I now have a basic knowledge of what fiat currency is, and what our long term prospects are, as a country operating on the monetary system that we have. What I’d like to know from all of you is this–What does it all mean to me as a “regular person” in the short and medium term?. I think I’ve figured out the hyperinflation, possible collapse of the dollar situation. Is it imminent? If so, what happens, in real terms, when it happens? Are there other scenarios that could happen before the actual collapse of the currency, other than recession/depression, job loss, etc? Give it to me straight and tell me what the politicians can’t and won’t tell me. I can balance a check book, never made a late payment in my life, have excellent credit, own about 48% of the equity on my home (almost 60% a year ago!), have a small 401k and some manageable very low interest credit card debt. What do you all think people like me should do–the small subset of taxpayers that have some, but not much of a clue? I’m not really looking for personal financial advice. I just want to have a clue of what’s coming down the pike. I don’t have money to invest in gold or anything crazy, but other than paying off the credit card debt what’s a person to do? I’m seriously thinking of buying a greenhouse, a couple of goats and some chickens. Am I nuts? Thanks for indulging me. I really want you to know that I am seriously, seriously wanting to hear what you have to say. Please educate me.

  14. a

    “What do you all think people like me should do–the small subset of taxpayers that have some, but not much of a clue?”

    IMHO the most important thing is to keep your job (or at least a job).

    Otherwise keep in good health – exercise and eat right.

  15. wintermute

    Hey Tasha.
    The amazing thing is that there are so many forces at work that some of the brightest economists are going to call the next few years wrong.
    In big picture terms we *should* expect a long period of deflation like the 1930’s. Falling prices and wages and general economic malaise.
    But! Because so many debts (mortgages, car loans etc) were obtained before deflation – then the govt will view a dose of inflation (printing) as a solution to all the screaming from the public about unpayable debts. The problem then is that this is like using fire to fight a fire and, yes, hyper-inflation can easily occur. The other problem is that the US relies on foreign holdings of Treasury debt (to fund the government). These debt-holders are probably so shell-shocked already – that a hint of inflation will have them dumping dollar-denomated debt until the dollar collapses. This latter process may already be underway.

  16. S

    looks like need a reprise of the cuts help equity. Europe down 6% across board. US selling off.

    Matt D –
    explain why selling covered calls is a good strategy or the Fed? Do you think the market is that stupid. Look at the long end of the curve today, it is blowing out.

  17. melpol

    The fat cat stock market has been shocked into reality. The house of cards is crumbling and when all is done the reality of responsible spending will take hold. But there will be social unrest because millions of non-productive employees will be standing in soup lines. Without a government that can afford financial support for the poor the nation will be sharply divided. But in time calm will prevail and people will accept their place in a new lifestyle.

  18. michael

    Hey Tasha.
    As wintermute said, expect a 1929 scenario. We already have deflation, so hopefully your in cash right now. However, in 6 to 24 months this is going to tilt into heavy inflation. (That is if the asians hold on to our treasuries, else its hyperinflation. And helicopter Ben can take a shortcut in this timeline and give us heavy inflation almost right away.)
    And when its inflation you’re hopefully in gold and *fixed-rate* dept only.
    So as you see the outcome is very clear, but how imminent it is is everybody’s guess.

    But because inflation will last longer than deflation, going into gold and out of adjustable-rate dept right away is advisable.

  19. tasha

    Thank you for responding. Not sure I totally get everything, but this is helpful. I will continue to follow your discussions. It’s been very helpful for me, even though much of what’s said here is over my head. I will be happy to give you the dumb taxpayer’s perspective should you ever require it. Thanks, all!

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