On the opening of New York trading, central banks from 6major countries cut interest rates by 50 basis points, withJapan and Norway not participating.
Here are the banks and the rates:
- U.S. Federal Reserve cut the Fed Funds rate from 2.0% to1.5% and the discount rate to 1.75% from 2.25%
- The European Central Bank cut overnight rates from 4.25%to 3.75%
- The Swiss National Bank cut overnight target to Liborfrom 2.5%-3.5% to 2.0%-3.0%
- The Bank of England cut overnight rates from 5.0% to4.5%
- The Bank of Canada cut overnight rates from 3.0% to2.5%
- The Swedish Riksbank cut overnight rates from 4.75% to4.25%
- The Peoples Bank of China cut rates 27 basis points on 1year depo rates and dropped reserve requirements to 17% from17.5%.
Here are the key lines from the Fed's statement:
"Incoming economic data suggest that the pace of economicactivity has slowed markedly in recent months. Moreover, theintensification of financial market turmoil is likely toexert additional restraint on spending, partly by furtherreducing the ability of households and businesses to obtaincredit. Inflation has been high, but the Committee believesthat the decline in energy and other commodity prices and theweaker prospects for economic activity have reduced theupside risks to inflation."
This is another piece of the puzzle to stabilize thefinancial markets. I believe these central banks acted inconcert to address the continued deterioration in lending andthe further tightening of credit.
Prior to the announcement, there was massive deleveragingout of yen carry with one cross down 17.5% in 48 hours. Priorto the announcement, the Nikkei was down 9.38% today. Prior tothe announcement, 3 month Libor to OIS spreads were 10-20points higher from yesterday. Prior to the announcement, theTED spread was at a new high of 391.5.
This meant that there was no current, positive movement oncredit from either the announced passing of the TARP programnor the Fed agreeing to buy commercial paper.Thus, action was required to stem the tide until theseplans get up and running and making an impact.
The markets are in the process of significantly downshiftingtheir outlook on economic growth and earnings. From Alcoa toSAP, companies are warning that the future is bleak due to thelack of credit and therefore dramatically reduced vendorfinancing. Economists are forecasting U.S. GDP to drop in Q4,Q1, and maybe be flat for Q2. Unemployment is expected to soarfrom 6.1% to as high as 8.0% by the end of 2009.
This adjustment is all occurring now and the markets havebeen simply brutal. I expect the direction we've taken over thelast weeks to remain intense until the end of October and intoNovember, as the frozen credit markets' negative impact show upin the economic data released in this time frame. My view isthat the volatility and uncertainty are far from over and willpersist well into Q4.At the minimum, we'll need a month of CP and TARP[troubled asset relief program] buying and lower rates toarrest the fall.
As I suggested, TARP was only the beginning. Additionalmeasures could be direct investments into U.S. banks torecapitalize them and expansion of assistance programs toconsumers. Think 1930s-style programs and you'll be closer towhat is possible. A new U.S. Presidentialadministration/Congress will be very active to expand thesetype of plans.All will help, all will take time.