Wikinvest Wire

A coordinated global rate cut

Wednesday, October 08, 2008

Well, you could see this one coming and, after an initial lackluster response, it looks like equity markets have gotten the message. In a coordinated action, banks in the U.S., Europe, U.K., Canada, Sweden, Switzerland, and China cut short-term lending rates this morning. This is what it looks like in the U.S. with the Fed funds rate now at 1.5 percent.
IMAGEHere's a summary of the before and after lending rates:

  • US: from 2.0% to 1.5%
  • ECB: from 4.25% to 3.75%
  • BOE: from 5.0% to 4.5%
  • Canada: from 3.0% to 2.5%
  • Sweden: from 4.75% to 4.25%
  • Switzerland: from 3.0% to 2.5%
  • China: from 7.2% to 6.9%
The Bank of Japan would have cut rates also, but they're still stuck at just 0.5 percent - they lent moral support instead.

Somehow, it seems like this is just the beginning and, if this Bloomberg report is any indication, it surely is.
After an initial rally, European shares and U.S. stock indexes headed lower. Some analysts said the central banks should have lowered rates by more, and predicted further reductions. Economists at Goldman Sachs Group Inc. and Morgan Stanley now project another half-point move by the Fed at its Oct. 28-29 meeting.

Futures on the Standard & Poor's 500 Stock Index dropped 3.7 percent at 9:19 a.m. in New York, after plummeting 15 percent in the past five trading days. Europe's Dow Jones Stoxx 600 Index slumped 3.9 percent. Japan's Nikkei 225 Stock Average lost 9.4 percent to 9,203.32 earlier today, before the announcement.

``It should have been 1 percent to have a real impact,'' said Robert Leonardi, a senior lecturer on European Union politics at the London School of Economics.
The British government separately announced an enormous £500B rescue package for its banking sector, a plan that will partly nationalize the banking system.

According to this report in the Guardian, the rescue comes in three parts:
  • £50bn of taxpayers' money will be offered to banks to rebuild their capital reserves
  • £200bn of liquidity is being made available as short-term loans in an attempt to thaw the frozen interbank lending markets. This is twice as much as was previouly offered under the Special Liquidity Scheme
  • A further £250bn will underwrite lending between banks - another attempt to shore up their balance sheets.
The plan is expected to cost British taxpayers £2,000 each.

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Return the Medal, Alan said...

Anyone remember when rates cuts occurred rarely, only at FOMC meetings and only in 1/4 point moves?

Now, people expect a full 1 point cut at any time if the Dow is off.

It's like a heroin addict needing more and more to get the same high.

Is there any precedent for NEGATIVE fed funds rates?

staghounds said...

I'm debt free, own my own house, have a couple of hundred thousand dollars in the bank, and earn about $100,000 a year.

So where's MY 1.5% loan?

Why do I have to go through a bank and give them 6%?

If I'm going to create and lend money at 1.5%, I want to lend it to ME!

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