U.S, European central banks united as crisis grew

WASHINGTON, Oct 8 - Top U.S. and European central bank officials shared increasing alarm over worsening economic and credit conditions with one another over the weekend in conversations that culminated in an unprecedented decision to cut rates in unison on Wednesday.

In an effort to stem the worst global financial crisis since the 1930s, central banks of the United States, the euro zone, Britain, Switzerland, Canada and Sweden all lowered official rates by a half-percentage point, and announced their move in a statement. Japan, while holding rates steady, endorsed the move.

The People's Bank of China also lowered benchmark borrowing costs by a quarter percentage point.

Federal Reserve Chairman Ben Bernanke, European Central Bank President Jean-Claude Trichet and Bank of England Governor Mervyn King speak regularly by phone. Those conversations ramped up over the weekend as downbeat economic news accumulated on both sides of the Atlantic, a source familiar with the situation said.

In the United States job losses had reached three-quarters of a million in 2008. Credit woes were dramatic: the commercial paper market, a vital source of funding for companies' daily operations, had contracted dramatically. Direct bank borrowing from the Fed shot to a record high, averaging an astonishing $368 billion a day.

Despite congressional passage of an historic $700 billion financial rescue package after weeks of drama, stock markets swooned.

In Europe, political leaders had met but rejected a U.S.-style financial rescue fund, even as European banks came under heavy pressure.

Adding to a sense of disarray, Ireland's decision to guarantee all deposits in Irish banks infuriated Britain, sucking money away from British banks where the guarantee is more limited.

In one-on-one phone conversations over the weekend, Bernanke, Trichet, and King shared a sense that the situation had become grave. No single factor tipped the balance, but each central banker saw enough malaise in his economy to justify a rate cut. Trichet had already laid out the rationale for monetary policy action in a speech the previous week.

It also seemed clear to policymakers, the same source said, that group action, which had never been done before, could have an important psychological effect. The move would declare that the credit crisis had reached global proportions. Even if politicians were casting about for solutions, central banks were able to mount a concerted international response.

Furthermore, coordinated action taking interest rates down among the major economies could spare the U.S. economy from a fresh blow if the dollar dropped, the participants agreed.

On a parallel track, the U.S. central bank was readying a plan to venture for the first time into commercial paper markets to ease day-to-day funding strains.

Bernanke spoke on Monday with most of the members of the Fed's interest-rate setting Federal Open Market Committee. Members agreed the data they were seeing, and the economy, had taken a palpable turn for the worse. Inflation, which had been a concern because of high oil and commodity prices, was receding as a worry.

On Monday night, central bank heads scheduled a conference call for 1030 GMT the following morning -- 6:30 a.m. in Washington. The call included Bernanke, Trichet, King, Canadian Central Bank Governor Mark Carney, and Bank of Japan Governor Masaaki Shirakawa.

On the call, the central bank governors quickly reached agreement on the need to act in unison and discussed how to word common statements. By the end of the conversation it was clear they would act by Wednesday morning.

The Swiss and Swedish central banks were brought into the joint statement separately.

The Fed did not contact the Chinese central bank about the action.

Bernanke spoke to the National Association of Business Economics mid-day on Tuesday. Although the Fed had stepped forward as a commercial lender of last resort with a facility to buy short-term, highly rated debt that morning, stocks were slumping.

The Fed chairman sent a clear message: the outlook for economic growth had worsened.

"The Federal Reserve will need to consider whether the current stance of monetary policy remains appropriate," he said.

The Fed held an FOMC meeting by videoconference on Tuesday night.

All voting members were present and agreed unanimously to the rate cut and the joint statement, which was released on Wednesday before markets opened.