World's central banks coordinate rate cuts

By David R. Sands (Contact) | Wednesday, October 8, 2008

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UPDATED:

Arguing that a global crisis demands a global response, the Federal Reserve and five other central banks slashed interest rates Wednesday morning in a surprise, coordinated bid to boost the international economy and reassure plunging stock and credit markets around the world.

But fresh bad economic news and market uncertainty continued to buffet investors, with Wall Street's major indexes losing ground again despite the half-point cut on the Fed's key federal funds rate for overnight bank loans to 1.5 percent a level not seen since 2003.

Wall Street could face yet another test Thursday with the expiration of an order banning "short-selling" on the stocks of nearly 1,000 commercial banks and financial firms. The Securities and Exchange Commission's order restricting short-selling essentially a bet that a stock will go down was set to expire at midnight Wednesday.

Opinion has been sharply divided over the impact of the SEC order. Some analysts and corporate heads blame short-sellers for concentrated attacks on individual stocks that undermined some of Wall Street's most powerful firms and exacerbated the stock and credit panic.

Short sellers say they play a critical role in helping investors determine the real value of stocks, and note that U.S. stock markets have suffered major losses in the three weeks the ban has been in place.

The losses continued Wednesday as the Dow Jones Industrial Average dropped 189.01 points (2 percent) Wednesday, giving away a nearly 200-point gain at the beginning of the trading session after the rate cuts were announced. The broader S&P 500 index also fell 11.29 points (1.13 percent) to 9,849.94.

Many international markets were more bearish, with Japan's Nikkei 225 Stock Average losing nearly 10 percent of its value Wednesday. The FTSEurofirst 300, a broad index of European stock markets, closed down 6.3 percent at 940.78 points, its lowest close since December 2003.

Russia, Indonesia, Ukraine and Romania all closed their stock exchanges and Brazilian stocks fell for a fifth day as emerging markets had their worst week in at least two decades.

Federal Reserve officials said the coordinated cut was the largest of its kind by far for the world's central banks, traditionally jealous of their national prerogatives. Treasury Secretary Henry M. Paulson Jr., in a briefing for reporters, said the move underscored the gravity of the problems facing the U.S. and world economy.

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