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Federal Reserve Rate Cut: Is it Enough?

By Reuters -  |  Posted 2008-10-08 Print this article Print

In an unscheduled announcement made as New York traders were reaching their offices, the Federal Reserve said it was cutting its key federal funds rate by 50 basis points to 1.5 percent.


Analysts questioned whether the move would be enough to turn the tide.

"The fact that we have got them coming across the board suggests that this is the end game," said Peter Dixon, an economist at Commerzbank in London. "Will it help the markets? Questionable in the short term."

The cuts followed days of calls for concerted action by economists and world leaders after repeated injections of liquidity by central banks into money markets failed to halt a crisis of confidence.

"The central banks of the world have finally woke up to the gravity of the current situation," said Charles Diebel, the head of interest rates strategy at Nomura. "This is a major step to convincing the world that they are serious about stabilizing."

British Prime Minister Gordon Brown called in a letter to leaders of the world's major economies for concerted action to guarantee interbank lending, a G7 source said.

Brown urged the leaders of other Group of Seven nations to issue "a set of national guarantees to a broadly similar design" to restore trust in the global market for bank funding, the source said.

Brown had said earlier the global financial market had ceased to function after bad debts stemming from a collapse in the U.S. housing market poisoned the system.


Britain offered to pump at least 50 billion pounds ($87.2 billion) into its biggest retail banks to help them survive the crisis.

Britain's offer of public money to take stakes in some of its best known high street banks follows a slump in which some have lost nearly half their value on the stock market amid investor fears they could collapse.

In an effort to kickstart stalled money markets, the Bank of England will offer at least 200 billion pounds in short-term lending. Britain is also guaranteeing up to 250 billion pounds to help banks refinance debt.

Italy prepared to announce its own measures which sources said could be based on the British model, while Spain has said it is setting up a 30 billion euro fund to buy assets from banks and keep credit flowing.


Hong Kong had followed Australia's lead in slicing a full point off its interest rates before the coordinated cut.

The Bank of Japan, which did not join the world's central banks' coordinated rate cuts, said it will study ways to improve its market operations to enhance stability of financial markets.

The crisis has caused turmoil in once flourishing economies.

Facing financial meltdown, Iceland has taken over two of its largest banks -- Landsbanki and Glitnir -- and is seeking a 4 billion euros ($5.4 billion) loan from Russia.

In the latest sign of gloom, corporate bankruptcies in Japan jumped 34.5 percent year-on-year, a research firm said.

A company source said carmaker Toyota Motor Corp may cut its annual profit outlook on sluggish global demand and a firmer yen.

(Additional reporting by Reuters global bureaus; Editing by Brian Moss and Mike Peacock)

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