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Fed, central banks coordinate interest-rate cut
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.
The SEC could have kept the ban in place until Oct. 17, but decided not to extend it.
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, 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.
“We must take care to ensure that our actions are closely coordinated and communicated so that the action of one country does not come at the expense of others or the stability of the system as a whole,” Mr. Paulson said.
The Treasury secretary revealed he wants to hold an emergency meeting of the Group of 20, which includes the major industrial nations and emerging powers of the developing world such as China, Brazil and India. World finance ministers gather in Washington this weekend for the annual World Bank and International Monetary Fund meetings.
With economists now widely predicting a sharp global economic downturn, both the White House and Democratic presidential nominee Sen. Barack Obama praised the central banks’ move as a step toward limiting fallout from the crisis.
“We hope that this action will start to stem the crisis,” White House press secretary Dana Perino said.
But Mr. Paulson cautioned that the recovery will take time, despite a series of recent government moves that include the just-approved $700 billion Wall Street rescue package and the Fed’s Tuesday announcement that it will for the first time buy short-term debt, known as “commercial paper,” directly from banks and businesses in a bid to unclog blocked money markets.
About the Author
Raised in Northern Virginia, David R. Sands received an undergraduate degree from the University of Virginia and a master’s degree from the Fletcher School of Law and Diplomacy at Tufts University. He worked as a reporter for several Washington-area business publications before joining The Washington Times.
At The Times, Mr. Sands has covered numerous beats, including international trade, banking, politics ...
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