U.S. Fed Joins Coordinated Round of Global Central Bank Emergency Reductions in Benchmark Rates

The action was taken in response to escalating pressures in the global financial markets, particularly global interbank markets, where LIBOR rates continued to track upwards and interbank borrowing spreads reached record levels. Some banks in the United States and Europe have been struck by sudden withdrawals of retail and wholesale deposits in a serious crisis of confidence.

The FOMC emergency action was also taken in response to the recent amplification of deflationary shocks, including contractions in credit availability for consumer loans, mortgage loans, and commercial paper markets, along with sharp drops in asset prices, including global equities, commodities, and home prices.

The seizing-up of global credit markets—in conjunction with further deflationary pressure on asset prices—poses significant downside risks to growth not only in the United States, but also in Europe and the emerging markets.

The coordinated rate action by global central banks is long overdue, as global financial markets have been writhing in a crisis mode for over a year, with the latest escalation in the summer months of 2008 representing the most dangerous blow-up in terms of potential deflationary shocks to growth in the world economy.

The move to coordinated action by the major central banks represents a new phase in the global financial crisis. Such moves are much more effective than unilateral action in terms of defusing the contagion and negative feedback loops that have been spinning back and forth from one major market to another.

With the U.S. economy in a contraction mode, Global Insight is projecting that the FOMC will lower interest rates even further, with the federal funds rate down to about 1.00% in the next few weeks.