Wednesday Update: Global Markets Down; Interest Rates CutWhispered fears of a global recession became louder on Wednesday, as world stock markets took yet another precipitous drop overnight. Japan's Nikkei had the biggest loss recorded since the 1987 market crash, with a 9.4% drop that wiped $250 billion off of Tokyo stock value.
The U.S. Federal Reserve and other countries' central banks immediately announced a cut in the policy interest rates, with a Â½ point reduction in the U.S. interest rate to 1.5 percent.
"The intensification of financial market turmoil is likely to exert additional restraint on spending," the Federal Reserve says in its statement announcing the cut. This will further reduce the ability of households and businesses to obtain credit. Inflation has been high, the statement continues, "but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation."
That the Federal Reserve Committee didn't wait until its scheduled meeting at the end of the month underscores how urgent the current crisis is domestically and worldwide.
The Bank of England shaved its rate by half a point to 4.5 percent. Europe's Central Bank cut its rate to 3.75 percent. Other central banks also cutting rates are the banks of Canada, Sweden, and Switzerland. For the second time in less than a month, China also cut its key interest rates Wednesday. The central bank cuts had been alluded to earlier in the week and were expected to be done more slowly over a longer period of time.
European banks pummeled in the credit crunch have been helped by European governments, with German and Iceland governments stepping in to aid banks. On Wednesday, the British government pledged $50 billion pounds ($87 billion dollars) to shore up and partly nationalize banks. It comes a day after bank stocks plunged in UK's stock markets, with some banks losing up to more than 35 percent of value on investor fears that British banks would not be able to survive the current economy without aid from the government.
The US stock market, which saw a 900 point drop over the past two days, opened down initially on Wednesday, but bounced back into the positive range in mid-morning trading. Stocks fell on Tuesday after Federal Reserve Chairman Ben Bernanke warned of more hard times ahead.