Fed, World’s Banks Pull Off Global Rate Reduction

In an unprecedented move aimed at quelling the mounting tidal wave of unrest affecting the world’s economies and investors, the Federal Reserve, in partnership with other central banks around the world, pulled off a coordinated reduction of short-term interest rates Wednesday.

Citing the recent intensification of the global financial crisis even while inflationary pressures are starting to moderate somewhat, the Fed, along with the Bank of Canada, the Bank of England, the European Central Bank, Sveriges Riksbank, and the Swiss National Bank, all announced rate reductions.

Ben Bernanke and his team at the Federal Open Market Committee took the federal funds rate down another 50 basis points (one-half a percent) to 1.5 percent. At the same time the FOMC decided to take the opportunity to move its discount rate down 50 basis points as well to 1.75 percent. Both reductions were unanimously approved.

In its official statement, the FOMC cited economic data suggesting that “the pace of economic activity has slowed markedly in recent months. 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 New York Times reported Wednesday that in a speech delivered the day before to members of the National Association for Business Economics, Bernanke said the economic turmoil has caused the Fed to downgrade its “already-gloomy economic outlook.”

In fact, during that speech Bernanke made it clear that the housing market was a key factor in that outlook.

“Economic activity had shown signs of decelerating even before the recent upsurge in financial-market tensions. As has been the case for some time, the housing market continues to be a primary source of weakness in the real economy as well as in the financial markets,” Bernanke said. “However, the slowdown in economic activity has spread outside the housing sector. All told, economic activity is likely to be subdued during the remainder of this year and into next year.”

Until stock indexes around the world tumbled in recent days, many of the central banks thought this to be just an American problem with only secondary ripple effects in Europe, the Times reported.

Now not only stock indexes are being affected, but recent news reports have focused on foreclosure problems in other parts of the world. As this latest round of rate reductions tends to prove, problems with the housing market — including foreclosures — are not going to be a short-lived phenomenon.

Until the core problem with the housing and financial markets is solved, foreclosures will continue to be pervasive, offering opportunities for home buyers and investors to get into the market before it eventually turns around sometime in the next few years.

After all of this, one question remains to be answered in the near future:

Will Ben Bernanke be out of a job with the new administration in January? Or will he even want the job with all the challenges to his authority and wisdom he has faced during the time he has headed the Fed?

Anyone want to submit their resume now?