Fed, major central banks slash rates

By William L. Watts, MarketWatch

Last update: 7:48 a.m. EDT Oct. 8, 2008

In coordinated announcements, the Fed said it had cut its key lending rate by a half point to 1.5%.

The Frankfurt-based European Central Bank trimmed its key refi rate to 3.75% from 4.25%, while the Bank of England cut its key rate to 4.5% from 5%. The Bank of Japan sat out the move, but issued a statement backing the action.

"Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months," the Fed said, in a statement. "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

The Bank of Canada, the Swedish Riksbank and the Swiss National Bank also cut rates.

The Fed move was unanimously approved by the rate-setting Federal Open Market Committee. And the statement indicated the Fed stands ready to move again whenever it feels it's warranted.

"The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability," the statement said.

Coordinated rate moves are extremely rare. Some economists had anticipated such action, however, warning that mounting financial turmoil threatened to turn a likely global economic slump into a historically deep downturn.

"The move is to be applauded but there is more to come," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. "The playbook to avoid depressions says rates need to be as close to zero as possible, banks have to be rescued, public spending has to rise and free trade must be maintained."

The move underscores how quickly problems in the financial sector have overtaken other economic considerations. As recently as July, the European Central Bank hiked its key lending rate by a quarter point to 4.25% in an effort to anchor inflation expectations in the face of surging commodity prices.

Similarly, the Bank of England had halted a series of rate cuts in April as inflation moved farther above its 2% annual target.

In a statement, the central bank said inflation is likely to rise further in coming months, likely moving above a 5% annual rate, but will then tumble back as the contribution from retail energy prices wane and spare capacity in the economy increases.

Instead, the focus is on conditions in credit markets, which have "deteriorated very markedly," the BOE said.

"Many markets are closed. In the United Kingdom, the supply of credit to households and businesses is clearly tightening further as banks seek to adjust their balance sheets," the statement said.

The Fed said that while inflation has been high, the rate-setting Federal Open Market Committee believed that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

The Fed also approved a 50 basis point cut in the discount rate to 1.75%