Central Banks Make Coordinated Rate Cut

As recently as Tuesday, Fed Chairman Ben Bernanke had expressed a reluctance to cut interest rates, instead touting the central bank's efforts to inject liquidity into the markets, including plans to begin buying commercial paper and increasing the size of a program that allows banks to borrow Treasuries in exchange for less liquid securities and other collateral.

Still, Bernanke did not close the door to a rate cut in his remarks to the National Association for Business Economics in Washington, D.C., saying "[s]o long as financial conditions warrant, we will continue to look for ways to reduce funding pressures in key markets."

The Federal Open Market Committee has held rate steady at 2% since April 2008, as the central bank has avoided cutting rates due to concerns about inflation, which remains above 5%, a level not seen since the early 1990s. The FOMC had cut its target rate 325 basis points over the prior seven months.

Global credit markets remain frozen, despite the Fed's maneuvering and Congress' passage of the $700 billion financial bailout plan last week. The federal government was moved to act after a series of cataclysmic events last month, beginning with its seizure of mortgage buyers Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote), the bankruptcy of Lehman Brothers (LEHMQ.PK Quote), the government bailout of American International Group (AIG Quote) and the failure of the nation's largest savings & loan, Washington Mutual.

Fearing for their own lives, Merrill Lynch (MER Quote) sold itself on the cheap to Bank of America (BAC Quote) and Wachovia (WB Quote), under pressure from federal regulators, sold itself to Citigroup (C Quote) for $2.16 billion, before accepting a $15.1 billion offer from Wells Fargo (WFC Quote) four days later.

The three sides have put a burgeoning legal battle over the competing deals on hold, while they attempt to work out a compromise.