En Attaque! (will it work?)
Needless to say that yours truly is finding it rather difficult to sit at the library doing advanced statistical derivations and proofs on a day where global central banks decided to collectively pull out the big sledge hammer in the continuing effort to quell the worst financial crisis since the Great Depression.
The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.
The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point.
Today's decision follows a global meltdown that sent U.S.
stock indexes heading for their biggest annual decline since
1937; Japan's benchmark today had the worst drop in two decades.
Policy makers are also aiming to unfreeze credit markets after
the premium on the three-month London interbank offered rate over
the Fed's main rate doubled in two weeks to a record.
The Fed reduced its benchmark rate to 1.5 percent. The ECB's
main rate is now 3.75 percent; Canada's fell to 2.5 percent; the
U.K.'s rate dropped to 4.5 percent; and Sweden's rate declined to
4.25 percent. China cut interest rates for the second time in
three weeks, reducing the main rate to 6.93 percent.
He would take comfort in the fact however that the the blogosphere is overflowing with comments on this latest drastical move. Macro Man is simply running an open diary and I invite my readers to take it up here or simply join the symposium over at MM's place. Meanwhile, it is of course way too early to gauge the potential effects. I do take note of the fact that Japan did not participate in move which suggests (to me at least) that the prospect of having a ZIRPY nation is not what the high lords of the G7 want at the moment. In that respect, I suspect the BOJ was politely asked to stay clear. As for the ECB, it seems as that Trichet et al. just had to swallow a huge piece of humble-pie with today's move and one can only hope that the institution will maintain at least a small part of its credibility after this. It will need it.
With respect to the word on the stree and market rumours this was what markets wanted, but it cannot of course prevent the incoming slowdown to the real economy as well as as it is unlikely to dramatically alter the pace of risky assets.
I will have more in another moment; for now, I will have to return to the comforting solace of advanced econometrics and math.