Monetary policy

Pulling in the same direction

The Federal Reserve, ECB and four other central banks cut interest rates

IT IS a sign of extraordinary times that dramatic and unprecedented attempts to address the crisis in financial markets no longer cause much of a surprise. And so it was with the co-ordinated action of America’s Federal Reserve and the European Central Bank (ECB), together with the central banks of Britain, Canada, Switzerland and Sweden. Each cut benchmark interest rates by half a percentage point on Wednesday October 8th. The Bank of Japan did not join in but expressed its support for the move. Separately, China’s central bank shaved its lending rate by 27 basis points (hundredths of a percentage point). It also reduced the required share of reserves that commercial banks must keep on deposit with the central bank by 50 basis points.

Getting the world’s big central banks to act in the same way on the same day was a welcome show of unity given the threat to the global financial system and economy. It also minimised the risk of currency instability: a unilateral rate cut by one central bank could have hurt its currency. It may also have prevented accusations that one country was trying to shift the burden of economic weakness onto others. So some form of choreographed action was widely expected this week. The Fed is not usually slow to cut rates in the face of a crisis but it appeared to be waiting until other central banks were prepared to join in. A rate cut by the Fed alone might not have packed much punch. Cutting rates in concert with others should give a better chance of lifting confidence.

The action is a momentous shift for the ECB. After its scheduled rate-setting meeting on October 2nd, the bank’s chief, Jean-Claude Trichet, had indicated that the ECB was leaning towards a rate cut soon. But before that, and despite increasing evidence that the euro-area economy faced recession, the bank had been worried most about inflation taking off. As recently as July, the ECB raised its key rate from 4% to 4.25% to signal to firms and households that it was serious about capping inflation. Now with euro-area inflation at 3.6%, still well above the bank’s target of “close to, but below” 2%, it has seen fit to relax policy.

David Bowers of Absolute Strategy Research, a consultancy, remarks “perhaps price stability is the gold standard of this crisis”. In the 1930s countries that cut their currency’s link to gold early, such as Britain, suffered less economic damage than those that clung on for longer. So policymakers will have drawn a lesson that there is a high price to pay for too much monetary rectitude, especially when others are more flexible. Better to join in than be left behind.

But the main lesson from the 1930s is that keeping monetary policy too tight when the economy is shrinking and banks are failing will ultimately lead to deflation. It is very doubtful that the ECB or the other European central banks have abandoned price stability as their primary objective. The ECB started cutting interest rates in 2001 when euro-area inflation stood at 3.1%, not far below where it is now. At that time, the bank fretted that the collapse of the tech bubble would take the economy down with it, and push inflation too low for comfort. The Fed was similarly concerned about the risk of deflation. The threat to the economy today seems far greater and, with oil and commodity prices slumping, the odds are that inflation is set to fall further—and quickly—from its recent peak. And the statement accompanying the central banks’ action argues that the joint rate cuts are in keeping with their duty to stabilise inflation, rather than a dereliction of it.

There is little doubt that more interest-rate reductions are on the way. The Fed slashed rates to 1% during the most recent downturn, a recession which turned out to be fairly mild. The prospects for the global economy look far worse than they did then, so rates in America are unlikely to stay at 1.5% for long. The one bright spot for Europeans, whose economies have struggled harder than America’s this year, is that their central banks have scope for far bigger cuts.

Hayek on the Business Cycle - Joseph T. Salerno

Good Policies Can Save the Economy

Why we need lower tax rates and more skilled immigrants.

LEE E. OHANIAN

President Bush argued that the passage of the Treasury rescue plan was necessary to prevent the U.S. from entering a severe downturn. Yesterday, the Federal Reserve announced it will begin buying commercial paper to, in the words of Fed Chairman Ben Bernanke, help "financial firms cope with reduced access to their usual sources of funding."

Both of these actions were designed to restore confidence in our financial markets. Unfortunately, they have created considerable fear about the underlying strength of the U.S. economy. This panic has roiled stock markets and led to comparisons between today's crisis and the Great Depression of the 1930s.

Getty Images

The Treasury plan and the Fed's emergency measures are certainly useful. However, their main contribution is not preventing a Depression-like scenario from evolving out of the current financial crisis. The real economy is a great deal stronger than many believe.

Despite the September employment report, there are no signs that the economy is on the verge of a depression. Real GDP rose at an annual rate of 2.7% over the last five quarters, which is on trend, once a correction is made for the decline in the growth rate of the working-age population. Productivity growth remains rapid. Consumer installment borrowing, which represents most consumer nonmortgage borrowing, is up 5% year over year, and the interest rates on these loans are equal to, or below, the levels that prevailed over the last five years. Commercial and industrial loans are up 9% year over year. And to those with good credit histories, conforming mortgages are available at 30-year fixed rates of around 6%. That represents an inflation-adjusted mortgage rate that is low by historical standards. So the current financial crisis is not as deep or as broad as some have feared.

Moreover, financial panics and crises are not as depressing as many believe. Current discussions point to the banking crises of the Great Depression as the best evidence that the financial crisis would devastate the U.S. economy. This is based on the very common misperception that the banking crises of the 1930s helped turn a garden variety recession into the Great Depression.

Banking panics did not create the Great Depression, nor did the elimination of panics via the introduction of deposit insurance generate economic recovery. The first banking crisis of any national significance didn't occur until the fall of 1931. Before this, there were regional banking crises that had no measurable impact on capital markets, as the spreads between Treasurys and risky obligations changed very little. However, the Great Depression was already "great" at this point -- industrial production and employment had fallen by more than 35%. The genesis of the Great Depression was not a banking crisis.

Given my view that the crisis is not as deep as some have feared, and that the potential impact of the crisis would be smaller than what has been advertised, should we even have adopted the Treasury plan?

Absolutely. While the economy would avoid a serious downturn in the absence of the Treasury plan, recent financial market conditions left unchecked could lead to a moderate recession. And there is a real danger that even a moderate recession, along with the current perception of an economic crisis, would lead to calls from various quarters for bad economic policies -- policies that tend to either pander to special-interest groups, benefiting relatively few at the expense of many, or raising taxes, particularly on the nation's most productive citizens, many of whom create jobs through their own enterprises.

There are many historical precedents of bad policies following crises. The worst case was after the stock-market crash in October 1929, which produced a truly perfect storm of bad policies. Tax rates rose, tariffs rose (reflecting special interest groups attempting to insulate domestic producers from foreign competition), and both Presidents Herbert Hoover and Franklin Roosevelt strongly promoted industry-labor cartels that were designed to stifle domestic competition.

In the absence of these policies, the Great Depression would almost certainly have been like every other U.S. recession -- short-lived and relatively mild. Normal recovery didn't begin until the most onerous of these policies were reversed, a process that didn't begin until the end of the 1930s when antitrust activity was resumed, and during World War II when the National War Labor Board reduced union bargaining power by limiting negotiated wage increases to cost-of-living adjustments only.

Bad polices impact the two most important determinants of living standards: output per worker and the amount of time devoted to market work. We need look no further than Western Europe to see how bad policies have depressed a number of advanced market economies. Hours worked per adult in the average Western European country have declined nearly 30% since the 1960s, as tax rates on labor are up 15 to 20 percentage points.

Japan in the 1990s is an example of bad policies that depress productivity growth. Once Japan stopped subsidizing inefficient production and reformed its banking system, productivity growth resumed. Another example is Mexico. After a financial crisis in 1981, Mexico had a depression resulting from polices that depressed productivity by severely restricting competition in its banking sector and by allocating loans to preferred borrowers at artificially low rates. Chile also had a financial crisis in 1981, but in contrast to Mexico, introduced policies that fostered competition in its banking sector and streamlined bankruptcy process. These policies contributed to substantial productivity growth that has sustained Chile's growth "miracle" for the past 25 years.

I am particularly concerned about bad policies because significantly higher taxes have been proposed by Barack Obama. His plan would raise the marginal tax rate on the most productive workers more than 10 percentage points -- an increase that would bring us near Western European levels. His plan would also raise capital income taxes, taxing capital gains and dividends at 20%, compared to a 15% rate under Sen. John McCain's plan. A five percentage-point difference might strike you as small, but it is not. I have calculated that a five percentage-point difference in overall capital income taxation over the long haul is equal to a difference in the nation's capital stock of about 18%. This means a 6% difference in GDP and a 6% difference in the average wage rate. This means that real GDP and the average wage would fall, gradually but persistently declining about 6% after 25 years. That's not quite a Great Depression, but a significant step towards one.

What should be done? We should encourage the immigration of prime-age individuals. Beginning in 2007, net immigration fell to half of its level over the previous five years. Increasing immigration would increase the demand for housing and raise home prices. And note that the benefit would be immediate. Home prices -- and the value of subprime obligations -- would rise in anticipation of a higher population base. The U.S. particularly needs highly skilled workers. These workers not only would purchase homes, but would generate higher living standards for all Americans.

Will we duck a depression? We will if the principles of economic growth -- increasing the incentives to work and save, promoting competition, and fostering economic openness -- are maintained. This is the most important lesson we learned, the hard way, from the 1930s.

Mr. Ohanian is a professor of economics at UCLA and director of the Ettinger Family Program in Macroeconomic Research.

Bailouts Prove Pale Substitutes for Market Trust: Mark Gilbert

Commentary by Mark Gilbert

Oct. 8 (Bloomberg) -- Every weekday, 16 bowler-hatted City gents meet at a secret London location. Flunkeys in red velvet jackets and white gloves serve swan canapes, port is passed to the left, and cigar smoke thickens the air. At 11 a.m., a gong sounds, and the financiers prepare to hold the world to ransom by dictating ever-higher interest rates for borrowers ranging from companies to homeowners to indebted students.

The gyrations in money-market rates and their disconnect with the monetary-policy intentions of central banks lend credence to the idea that a shadowy cabal of bankers is manipulating the daily suite of borrowing costs known as the London interbank offered rates, or Libor.

The truth, though mundane, is actually even more worrisome, since it suggests that yet another pillar of the global capital markets is built on quicksand. It turns out that in times of stress, the world of finance has no idea what the cost of money should be.

As things stand, the guys and girls responsible for responding to the British Bankers Association's daily question about what their banks would pay to borrow in various currencies and for differing tenures have no clue how to answer the question -- because there's no unsecured lending to guide them.

If they contribute rates that are too low, their compliance officers will ask questions. Pitch too high, and pesky financial journalists may start to suggest that their bank is the weakest horse in the glue factory.

Fiction and Guesswork

So if the variable interest rate that you pay on your mortgage, credit card, auto loan or company credit line is based on Libor -- and more than $390 trillion of debt is tied to the London reference rate -- then your borrowing costs are at the whim of fiction, guesswork, and whether the head of money markets at Hokey-Cokey Bank has a hangover or not.

Entries for yesterday's three-month dollar Libor fix, for example, ranged from 3.3 percent from WestLB AG to 5.05 percent from Barclays Plc, a gap of 175 basis points. In the first quarter of this year, the average gap between the submissions from those two banks was less than half a basis point, and never exceeded seven basis points.

The BBA names the banks and the individual rates they provide. In New York, a rival three-month rate that broker ICAP Plc began publishing on June 11 allows for anonymity, which might explain why ICAP's rate is about 45 basis points higher than Libor. The difference is another example of weakening trust.

Destroying Trust

It doesn't matter whether the U.S. gives its banks a $700 billion get-out-of-jail card, Europe guarantees all retail deposits, Australia slashes interest rates, and Russia buys a stake in Iceland for $5.4 billion -- banks won't lend to their kind, nor to companies, nor to home buyers, if they reckon the money won't be repaid.

Unfortunately, the authorities have helped to destroy trust. Knee-jerk responses to every twist and turn in the credit crisis smack of desperation. Allowing Lehman Brothers Holdings Inc. to go bang led to an ``absolute loss of confidence in markets,'' European Central Bank member Miguel Angel Fernandez Ordonez said yesterday.

History will probably judge that the decision to ban the short selling of a ridiculously wide range of stocks was a mistake of epic proportions. And suspending all equity trading in markets including those of Brazil, Russia, Ukraine and Iceland just makes investors fearful that they won't be able to get their money out until it is too late.

Solvency Scare

Governments need to find some way to separate the availability of credit from the cost of money. When loans are tied to Libor, both the supply and the price of money rely on the same shaky foundation, the perceived creditworthiness of financial institutions.

While the current mish-mash of money-market mechanisms funnels billions of dollars to financial institutions, the cash then gets trapped in the paranoia of today's solvency scare. It doesn't make it into the wider economy. Central banks may need to lend directly to companies and consumers, cutting out the dangerous, unreliable middlemen of the markets.

Borrowers, meantime, should consider untangling their economic destinies from those of the banks. Maybe Libor should be allowed to wither; instead, link borrowing costs directly to central-bank rates, or to swap-market rates, or even the credit- default swap rates of non-financial companies.

The various treatments offered by governments until now have failed because placebos don't work when the patient knows that the medicine is fake. Until some semblance of trust returns to financial markets, nobody will know the value of a dollar, a euro, a pound or a yen.

McCain, Obama Clash on Taxes, Regulation, Skip Personal Attacks

Oct. 8 (Bloomberg) -- Republican John McCain and Democrat Barack Obama collided over regulation, taxes and the financial crisis in last night's debate, holding back on the personal attacks that have intensified in the campaign's recent weeks.

The two senators stuck to familiar themes, and the event lacked any of the fireworks each side said it was prepared to deliver. McCain stressed his record of seeking bipartisan compromise on issues from campaign finance to climate change, while Obama vowed to reverse the policies of the last eight years that he said helped create the mortgage crisis.

``I've fought excess spending. I've fought to reform government,'' said McCain, who also pledged to buy mortgages of homeowners facing foreclosure and renegotiate them. Obama said he best understood the plight of working-class Americans, promising a middle-class ``rescue package'' and tighter regulations on the financial industry.

Just four weeks before the election, Obama is gaining in the polls, and if McCain's task was to produce a game-changer, he didn't get one in the second of their three debates.

``Was this debate enough to shift the momentum away from Obama? I don't think so,'' said Charlie Cook, editor of the nonpartisan Cook Political Report in Washington.

Neither candidate altered the course of the race, said Alan Schroeder, author of ``Presidential Debates: Forty Years of High-Risk TV.''

``It puts everything back to where it was 90 minutes earlier, and that's good for Obama,'' Schroeder said.

Buy the Mortgages

The town hall-style forum at Belmont University in Nashville, Tennessee, focused largely on the economy, yet also touched on health care, energy and foreign policy. Each candidate answered questions from the audience.

When asked about the quickest way to help Americans struggling with financial ruin, McCain said he would order the Treasury Department to purchase bad mortgages to keep people in their homes.

``And it's my proposal, it's not Senator Obama's proposal, it's not President Bush's proposal,'' McCain said. His campaign estimates it would cost about $300 billion, some of which could be diverted from an existing $700 billion rescue package.

While there may be differences in the details, the idea is similar to a program put in place during the Great Depression and has been floated by others in Congress -- including Obama.

``We should consider giving the government the authority to purchase mortgages directly instead of simply mortgage- backed securities,'' Obama said at a Sept. 23 news conference in discussing elements of the bailout package.

Bucking the Party

McCain repeatedly attacked Obama's record, saying the Democrat would raise taxes and has never bucked his party's leadership.

Obama responded by saying McCain has been in Washington for 26 years and hasn't been able to bring about changes in government. ``It's easy to talk about this stuff during a campaign,'' Obama said.

The face-off comes as national and state polls show that worries about the economy have bolstered Obama's standing with voters.

Some of the most forceful moments for the Democrat came when he challenged McCain on foreign policy, particularly on what he called his ``cheerleading'' for the war in Iraq. Obama said McCain's stance on Iraq would keep the U.S. mired in a conflict that's draining economic and military resources.

``It was the wrong judgment,'' Obama said, adding later that ``there has never been a nation in the history of the world that saw its economy decline and maintained its military superiority.''

Obama's `Cronies'

McCain went on the offensive early, in an answer to a question about how the government plan to rescue Wall Street would help taxpayers.

He blamed ``Senator Obama and his cronies'' for encouraging Fannie Mae and Freddie Mac to jump into the subprime-mortgage market while taking campaign contributions from the two mortgage giants.

``One of the real catalysts, really the match that lit this fire, was Fannie Mae and Freddie Mac,'' McCain said.

Obama said the rescue package signed by President George W. Bush on Oct. 3. would free up credit markets to help businesses pay employers and suppliers.

``Now, I've got to correct a little bit of Senator McCain's history, not surprisingly,'' Obama said in response to McCain's attack. He cited McCain's past support for lessening government regulations and noted reports that a lobbying firm owned by McCain's campaign manager, Rick Davis, did work on behalf of Freddie Mac.

Government Mandates

The candidates disagreed on health care, with Obama calling it a ``right'' and McCain saying he is wary of government mandates. McCain said Obama's plan for universal coverage would extend too much power to the government and end up hurting small businesses; Obama criticized McCain for voting against an expansion of government health insurance for children.

Both candidates lauded billionaire investor Warren Buffett when asked who they would choose as Treasury secretary.

``Warren would be a pretty good choice,'' Obama said, after McCain raised Buffett's name and that of former EBay Inc. Chief Executive Officer Meg Whitman. Buffett supports Obama, while Whitman is backing McCain.

The latter part of the debate focused more on foreign policy. Each candidate was asked whether Russia is an ``evil empire.'' Obama said the country has engaged in ``evil behavior'' and might be dangerous. McCain responded ``maybe'' and said much depends on how the U.S. responds to Russia.

Obama Wins Poll

A post-debate survey of 516 uncommitted voters by CBS News and Knowledge Networks found that 40 percent thought Obama won last night's debate, compared with 26 percent who saw McCain as the victor. After the first contest on Sept. 26, the same poll found Obama winning by a margin of 39 percent to 25 percent.

The two met as the campaign over the past several days has grown increasingly heated and personal.

McCain's running mate, Alaska Governor Sarah Palin, has criticized Obama for his association with William Ayers, a former member of the Weather Underground radical group. Palin said Obama is someone who would ``pal around with terrorists who targeted their own country.'' Obama once served on a charity board with Ayers, and has denounced the bombings by the Weather Underground, which took place when Obama was a child.

Obama's campaign responded by launching a Web site about McCain's relationship with former savings-and-loan executive Charles Keating during the 1980s collapse of the industry, looking to draw comparisons between today's market upheaval and McCain's role in the S&L scandal.

Yen Rises to 3-Year High on Concern Rate Cuts May Fall Short

Oct. 8 (Bloomberg) -- The yen rose to a three-year high against the euro and gained versus the dollar on concern interest-rate cuts by global central banks may fail to boost confidence, encouraging the sale of higher-yielding assets.

Japan's currency surged against the Australian dollar, the New Zealand dollar and the Norwegian krone on speculation deepening credit market turmoil will lead to a drop in carry trades. The Mexican peso and the Brazilian real plunged versus the greenback on reduced demand for emerging-market currencies.

``They waited too long to sort these things out,'' said Scott Ainsbury, a portfolio manager who helps manage $14.6 billion in currencies at New York-based FX Concepts Inc. ``It's not enough. You buy nothing else but the dollar and the yen.''

The yen gained 0.3 percent to 137.49 per euro at 10:02 a.m. in New York, from 137.89 yesterday. It touched 134.17, the strongest level since August 2005. Japan's currency advanced 0.9 percent to 100.53 per dollar from 101.47. The dollar depreciated 0.7 percent to $1.3676 per euro from $1.3588. It touched $1.3444 on Oct. 6, the strongest since August 2007, when the credit market crisis gathered momentum.

The Federal Reserve reduced its target lending rate by a half-percentage point to 1.5 percent, while the European Central Bank and the central banks of the U.K., Canada, Sweden and Switzerland also reduced rates. Separately, China's central bank lowered its key one-year lending rate.

Surging Yen

The yen gained 6 percent to 67.35 against the Aussie, 4.3 percent to 60.57 versus the New Zealand dollar and 1 percent to 16.22 against the krone on bets investors will abandon trades in which they get funds in a country with low borrowing costs buy assets where returns are higher.

The Bank of Japan held its target lending rate at 0.5 percent yesterday, compared with 7.5 percent in New Zealand and 5.75 percent in Norway. The Reserve Bank of Australia cut its target rate by 1 percentage point to 6 percent yesterday.

Implied volatility on one-month euro-dollar options reached 20.11 percent, an all-time high. Implied volatility on one-month dollar-yen options soared to 25.42 percent, the highest since October 1998.

The real dropped 6 percent to 2.4501 against the dollar, while the peso declined 7 percent to 13.2339.

Finance ministers and central bankers from the Group of Seven nations will meet in Washington on Oct. 10 to discuss the financial crisis. Measures to stabilize global stock markets will be on the agenda, according to a Japanese official who briefed reporters on condition of anonymity before the central banks' announcement. The G-7 comprises Canada, France, Germany, Italy, Japan, the U.K. and the U.S.

G-7 Meeting

``The actions are a good sign for the upcoming G-7 meeting,'' said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank. ``It's showing that some sort of coordination may be taking place.''

The ECB's main refinancing rate is now 3.75 percent; Canada's fell to 2.5 percent; the Bank of England's rate dropped to 4.5 percent; and Sweden's rate declined to 4.25 percent. Separately, China cut interest rates for the second time in three weeks, reducing the main rate to 6.93 percent.

The Fed also cut its rate on direct loans to banks, the so- called discount rate, by a half-point to 1.75 percent. The U.S. central bank said yesterday it would set up a special vehicle to buy commercial paper and help revive the corporate-debt market.

Fed, ECB, Central Banks Cut Rates in Coordinated Move (Update3)

Oct. 8 (Bloomberg) -- 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.

``They are throwing the kitchen sink in to try to find stability,'' said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. ``They are clearly trying to get the transmission started again'' after a freeze-up of money markets.

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.

Official Statement

``The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,'' according to a joint statement by the central banks. ``Some easing of global monetary conditions is therefore warranted.''

After an initial rally, European shares and U.S. stock indexes headed lower. Some analysts said the central banks should have lowered rates by more, and predicted further reductions. Economists at Goldman Sachs Group Inc. and Morgan Stanley now project another half-point move by the Fed at its Oct. 28-29 meeting.

Futures on the Standard & Poor's 500 Stock Index dropped 3.7 percent at 9:19 a.m. in New York, after plummeting 15 percent in the past five trading days. Europe's Dow Jones Stoxx 600 Index slumped 3.9 percent. Japan's Nikkei 225 Stock Average lost 9.4 percent to 9,203.32 earlier today, before the announcement.

``It should have been 1 percent to have a real impact,'' said Robert Leonardi, a senior lecturer on European Union politics at the London School of Economics.

World Recession

Global policy makers are reducing rates as economies weaken around the world. The International Monetary Fund said the global economy is heading for a recession in 2009 and increased its estimate of losses from the financial crisis to $1.4 trillion.

The Fed's Open Market Committee, which voted unanimously for the move, said in its statement that ``incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial-market turmoil is likely to exert additional restraint on spending.''

European policy makers were forced into action after the collapse of Lehman Brothers Holdings Inc. last month roiled world financial markets and caught them off guard. The ECB raised rates in July and Bank of England Governor Mervyn King warned the government as recently as Sept. 16 that inflation was set to accelerate.

The decision to let Lehman go ``had enormous, very unfortunate consequences,'' Trichet said Oct. 2. On the same day, he said the ECB was ready to cut rates.

Bernanke Message

Today's action comes a day after Fed Chairman Ben S. Bernanke failed to assuage investors' concerns about the deteriorating economy by signaling he was ready to lower borrowing costs.

Fed officials, who have kept their benchmark rate at 2 percent since April, may have wanted time for their record loans to the financial industry and new programs, including purchases of commercial paper, to bear fruit before lowering rates. Investors instead perceive the economic outlook deteriorating more rapidly, necessitating rate reductions.

The declines in U.S. shares the past two days followed pre- market opening announcements of fresh actions by the Fed to unblock credit markets. On Oct. 6, the U.S. central bank doubled its planned auctions of cash to banks to as much as $900 billion. Yesterday, it unveiled a unit to buy commercial paper, debt used by companies for short-term funding.

G-7 Meeting

Central bankers acted two days before they gather with finance ministers from the Group of Seven industrial nations in Washington. The timing suggests the central banks sought to avoid any appearance of being influenced by governments, said Ted Truman, former chief of the Fed's international-finance division.

``It was clear that if they wanted to do it, they had to do it before Friday,'' said Truman, now a senior fellow at the Peterson Institute for International Economics in Washington. ``they don't want to see as being coordinated by their finance ministers into doing this.''

Bernanke said in a speech yesterday that an intensifying credit crunch means officials must ``consider'' lowering borrowing costs.

In more typical market conditions, stocks rally when a Fed chief indicates he'll reduce rates. Now, Bernanke's message may have less power because traders already anticipated for weeks that policy makers would need to make that move, and because of rising concern even rate cuts may do little to immediately help banks scrambling to reduce their vulnerability to loan losses.

``In normal times, a rate cut would have a positive effect,'' Gary Schlossberg, senior economist at Wells Capital Management in San Francisco, said yesterday. ``What's troubling the market'' is concern about ``the solvency and losses of major institutions. The market is uneasy because it doesn't have a lot of information on what the depth of those losses will be.''