WASHINGTON – The world’s central banks launched a dramatic bid to contain the financial crisis, simultaneously cutting interest rates in 21 countries. The move sent markets fluctuating as pessimism about the world economy continued to deepen.
So stark are conditions that the International Monetary Fund and other economists now expect the United States to enter a recession this year, with surging unemployment. The slowdown will take “considerable time” to resolve – years, not months, the IMF said Wednesday in its annual World Economic Outlook report.
The IMF and its sister organization, the World Bank, this week will offer policymakers their first chance to meet in person since the near-meltdown in financial markets began last month. They will hold their annual meeting against a backdrop of the most dire financial circumstances in generations.
Wednesday alone, authorities in London, the world’s banking capital, partly nationalized many of the world’s biggest banks and ordered the liquidation of others. The stock market in Japan, the world’s second-largest economy, fell 9.4 percent in a single day. U.S. officials pleaded with markets for patience, saying it has the tools to repair confidence among financial institutions.
And all of that occurred as the world’s central banks moved, in an unprecedented global measure, to lower interest rates. Lower rates generally make borrowing cheaper and boost the economy, thus giving a lift to stock prices. But Wednesday the effect on markets was ephemeral.
The Dow Jones industrial average fluctuated throughout the day before closing down 189.01 points, or 2 percent. European markets were down more sharply, reflecting negative developments after they had closed Tuesday. The British stock market was down 5.2 percent.
Nonetheless, the rate cuts were a vivid show of force, indicating both the global scope of the crisis and the urgency with which economic policymakers around the world are seeking to act together. The Federal Reserve cut the short-term interest rate it controls by half a percentage point, as did the European Central Bank and monetary policy authorities in Canada, Switzerland and Sweden. The Bank of Japan endorsed the action, and the Chinese central bank made a smaller rate cut of its own.
The Fed and European Central Bank jointly cut rates after the Sept. 11, 2001, terrorist attacks, but never have so many of the world’s monetary policy makers acted in concert. China rarely joins the West in coordinating economic policy.
“We’re all very much in the same boat here,” said Ethan Harris, a managing director and economist at Barclays Capital. “The markets have been begging for some sign that policymakers understand the global nature of the crisis, and this was it.”
Although stock markets fell, there were some positive signs that credit markets were improving, even if they remain deeply strained overall. For example, prices for U.S. government bonds fell, suggesting that investors were less fearful and thus less inclined to pour money into those ultra-safe investments.
The IMF said Wednesday that the financial crisis would cause the world’s industrialized countries to experience their weakest year of growth next year since 1982. It predicted a recession in the United States, with unemployment averaging 6.9 percent in 2009. The rate hasn’t been that high since 1993 and is currently 6.1 percent.
The IMF and many private economists now expect the U.S. slowdown to last years rather than months. “It will take considerable time before losses are fully recognized, banks are recapitalized, leverage is reduced and market confidence is regained,” the IMF said in its report.
The combined rate cuts, which could be followed by more of the same in some of the countries involved, would help limit that damage by making it cheaper for consumers and businesses to borrow money. However, the cuts may have less impact than they normally would because of the deep credit crisis, as many banks are disinclined to lend to would-be customers at any price.
Olivier Blanchard, chief economist of the IMF, said in a news conference that the interest rate cuts were a “step in the right direction” but that more may be needed.
The Fed lowered the federal funds rate at which banks lend to each other to 1.5 from 2 percent. It had been cutting the rate drastically in a campaign that ended in the spring, then went on hold, indicating it was more worried about inflation. But the profound financial crisis and a slew of weak economic data from even before the credit markets froze persuaded Fed leaders that they needed to take action to stimulate the economy and that the risk of high inflation had receded.
“Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months,” the policymaking Federal Open Market Committee said in a statement.
The Fed gave no strong indication of whether it would cut the rate again at its regularly scheduled meeting Oct. 28 to 29. Policymakers will make that judgment based on how credit markets fare between now and then and on the latest economic data.
Wednesday’s action was engineered primarily by Fed Chairman Ben Bernanke, Bank of England Governor Mervyn King and European Central Bank President Jean-Claude Trichet in a series of phone calls over the weekend. The three central bankers have collaborated for years; King and Bernanke in particular come from the same insular world of academic monetary economists.