Central Banks Make Coordinated Rate Cut

Updated from 8:37 a.m. EDT

The Federal Reserve, the European Central Bank and other major central banks cut interest rates Wednesday in a coordinated effort to stem the global financial crisis.

The Fed cut its key lending rate a half-point to 1.5%, and the ECB cut its key rate a half point to 3.75%. The Bank of England cut its key rate by a half point to 4.5%. The central banks of Canada, Sweden and Switzerland also reduced rates.

The Bank of Japan expressed its strong support of these policy actions, the Fed said in a statement.

The Fed, which had resisted rate cuts since April, despite sagging equities and credit markets, said it reduced rates "in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures."

"Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months," the Fed said in the statement. "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. Inflation has been high, 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."

The Fed also approved a 50-basis-point decrease in the discount rate to 1.75%.

The Dow Jones Industrial Average fluctuated wildly throughout the day, falling as much as 250 points, but more recently was up more than 100 points on encouraging signs in the credit markets.

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) and Freddie Mac ( FRE), the bankruptcy of Lehman Brothers ( LEHMQ.PK), the government bailout of American International Group ( AIG) and the failure of the nation's largest savings & loan, Washington Mutual.

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