Will the coordination matter?
I expressed concern yesterday about the lack of global policy coordination to deal with what is a global financial crisis. In that context, this move is somewhat reassuring: Central banks around the world cut short-term interest rates by up to half a percent on Wednesday after investors across Asia and Europe unleashed waves of sell ...
I expressed concern yesterday about the lack of global policy coordination to deal with what is a global financial crisis. In that context, this move is somewhat reassuring: Central banks around the world cut short-term interest rates by up to half a percent on Wednesday after investors across Asia and Europe unleashed waves of sell orders onto already depressed stock exchanges. The Federal Reserve, the European Central Bank and other central banks from Britain and Switzerland to Canada and China announced rate reductions within seconds of each other. The British government separately announced a plan to pump billions of pounds into the country’s leading banks as part of a plan that would result in considerably greater government influence over the financial sector there.... Federal Reserve officials said this was the first time ever that the Fed coordinated a reduction in interest rates with other central banks, though the United States has periodically joined with other countries to intervene in currency markets to stabilize foreign exchange rates. The closest thing to a precedent for Wednesday’s action came in November 2001, when the Fed and the European Central Bank announced a rate reduction on the same day. But those actions were nominally independent, and they did not involve any additional foreign central banks. The question is whether it will matter at this point. And this is a question to which I do not have an answer. UPDATE: Paul Krugman provides a disturbing answer -- and he has the data to back him up: I don’t expect much from it — because the relationship between Fed funds rates and the rates most businesses actually pay is very weak right now, thanks to the messed-up state of the financial system. A quick illustration: in early July 2007, before the crisis, the target Fed funds rate was 5.25% and the rate on 30-day A2/P2 commercial paper — that is, CP issued by less-than-sterling borrowers — was 5.4%. On Monday of this week, the target Fed funds rate was 2%, down 325 basis points from pre-crisis levels, but the CP rate was 5.61% — up from pre-crisis levels. ....We’re way past the point at which conventional monetary policy has much traction. ANOTHER UPDATE: C. Fred Bergsten and Arvind Subramanian offer their take on what a global response should look like in the Washington Post; Martin Wolf proffers his in the FT.
I expressed concern yesterday about the lack of global policy coordination to deal with what is a global financial crisis. In that context, this move is somewhat reassuring:
Central banks around the world cut short-term interest rates by up to half a percent on Wednesday after investors across Asia and Europe unleashed waves of sell orders onto already depressed stock exchanges. The Federal Reserve, the European Central Bank and other central banks from Britain and Switzerland to Canada and China announced rate reductions within seconds of each other. The British government separately announced a plan to pump billions of pounds into the country’s leading banks as part of a plan that would result in considerably greater government influence over the financial sector there…. Federal Reserve officials said this was the first time ever that the Fed coordinated a reduction in interest rates with other central banks, though the United States has periodically joined with other countries to intervene in currency markets to stabilize foreign exchange rates. The closest thing to a precedent for Wednesday’s action came in November 2001, when the Fed and the European Central Bank announced a rate reduction on the same day. But those actions were nominally independent, and they did not involve any additional foreign central banks.
The question is whether it will matter at this point. And this is a question to which I do not have an answer. UPDATE: Paul Krugman provides a disturbing answer — and he has the data to back him up:
I don’t expect much from it — because the relationship between Fed funds rates and the rates most businesses actually pay is very weak right now, thanks to the messed-up state of the financial system. A quick illustration: in early July 2007, before the crisis, the target Fed funds rate was 5.25% and the rate on 30-day A2/P2 commercial paper — that is, CP issued by less-than-sterling borrowers — was 5.4%. On Monday of this week, the target Fed funds rate was 2%, down 325 basis points from pre-crisis levels, but the CP rate was 5.61% — up from pre-crisis levels. ….We’re way past the point at which conventional monetary policy has much traction.
ANOTHER UPDATE: C. Fred Bergsten and Arvind Subramanian offer their take on what a global response should look like in the Washington Post; Martin Wolf proffers his in the FT.
Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner
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