Fed slashes interest rates, but stocks lose again

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(Agencies)
Updated: 2008-10-09 11:29

WASHINGTON -- Wall Street bounced higher and lower Wednesday trying to make up its mind about an unprecedented coordinated interest rate cut by central banks around the world. In the end it settled on a familiar feeling, fear, and plunged again.

US Secretary of the Treasury Henry Paulson speaks at a press conference in Washington, DC. The Federal Reserve slashed its interest rates on Wednesday in a coordinated move with other major central banks as new economic forecasts painted a dismal picture of the US economy. [Agencies]

The Federal Reserve, desperately trying to jump-start the lending that keeps the US economy moving, dropped its closely watched federal funds rate to 1.5 percent. The cut from 2 percent took the rate to its lowest level in more than four years.

Central banks in England, China, Canada, Sweden and Switzerland and the European Central Bank also cut rates after a series of high-stakes phone calls over several days among Fed Chairman Ben Bernanke and his counterparts.

But the Dow Jones industrial average lost another 189 points, or 2 percent, to close at 9,258. It was the sixth consecutive day of losses for the Dow. The index has shed more than a third of its value, nearly 5,000 points, since its all-time high, set one year ago Thursday.

The day's losses were lighter for the Nasdaq composite index and the Standard & Poor's 500. And Wall Street as a whole fared far better than Asia, where some stock exchanges were down 9 percent, and Europe, where some lost 5 percent.

The Fed acted in concert with the European Central Bank to make emergency interest rate cuts after the September 11 terror attacks in 2001. But Wednesday's cuts were unprecedented with the number of nations that participated, the Fed said.

For millions of Americans, the Fed's cut means that borrowing money becomes cheaper. Home equity loans, credit cards and other floating-rate loans fluctuate depending on what the Fed does.

Bank of America, Wells Fargo and other banks cut their prime rates by half a point to 4.5 percent, also the lowest in more than four years, after the Fed announced its decision early Wednesday.

Fed watchers believe the central bank might cut rates further when it meets late this month, and perhaps again in December, in hopes of cushioning the blow should the United States fall into recession.

"Even if the financial crisis was put to bed today, that would still leave the economy in a probable recession," said economist Ken Mayland, president of ClearView Economics.

One day after a presidential debate that focused heavily on the economy, both major candidates embraced the decision. Both Democrat Barack Obama and Republican John McCain described the crisis as global.

The White House welcomed the cooperation among central banks to battle the crisis. "It's important and helpful that central banks are working in a coordinated way to deal with stress in the financial system," spokesman Tony Fratto said.

Even the coordinated action may not break the panicky mindset that has gripped investors across the world as jobs evaporate and retirement savings dry up. Banks may still be inclined to hoard cash, and until they decide to lend again the crisis is not likely to let up.

If anyone needed evidence, major American retailers turned in dismal sales figures for the third quarter, further proof that consumer spending, the lifeblood of the economy, is sputtering.

"The turmoil will not end quickly, and significant challenges remain ahead," Treasury Secretary Henry Paulson told reporters at a preview of meetings this week of the finance officials of the Group of Seven major industrial countries, the 185-nation International Monetary Fund and the World Bank. The global credit crisis was expected to be the major agenda item at those talks.

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