Global cut in interest rates expected

The Federal Reserve cut the benchmark interest rate half a point on Wednesday in the wake of volatile market conditions earlier in the week.

The central banks of several European nations and China also lowered their lending rates in an effort to improve what has otherwise been a grim economic outlook recently.

The New York Times reports that the actions taken by the Fed on Wednesday were the first ever instance of the United States coordinating with a number of other central banks to lower interest rates.

“At last, a coordinated show of force,” Ian Shepherdson, chief United States economist at High Frequency Economics, writes in a note to the New York Times. “The move is to be applauded but there is more to come. The playbook to avoid depressions says rates need to be as close to zero as possible.”

Rates have not been as low as they are, however, since 2004. Some consider the measure a crucial step because the bailout plan passed by Congress has done little in recent days to ward off large drops in the stock market.

One of the major components of the current crisis is that there is not a lot of liquidity in the market for credit. Due to concerns over taking on too much risk, financial institutions are unwilling to lend.

Consequently, there is little opportunity for growth. Lowering the interest rate can in some cases make it “cheaper” to borrow money, and the hope is that this will in turn stimulate growth and reverse the current contraction being seen in the market.

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