Historic week: Six years ago, this Federal Reserve decision ‘shook the world’

As Ben Bernanke enters his final week in office as US Federal Reserve chairman, this blog will go back in time and take a look at some of the key moments of his era.

Arguably, when the global credit crisis of 2007-2008 erupted, the US Fed chairman, because of circumstances, became the person leading the frantic efforts to prevent the US — and quite possibly, the rest of the global economy -– from falling into a crippling economic depression.

In what some market experts now dub “the week that shook the world”, on January 22, 2008, the Federal Reserve made an unprecedented interest rate cut of 75 basis points, lowering the policy rate (the federal funds rate) to 3.5%. (One hundred basis points equal one percentage point.)

That step occurred just as the global credit crisis was in its start-up phase. Financial markets (money markets, in particular)  and mortage lenders were already facing heavy turbulence, the housing market was collapsing and the US economy was teetering on the brink of recession. Ratings agencies were downgrading financial institutions, especially mortgage products, while global markets were tumbling.

(If you want to read a news story of that time, I suggest this CNN link.

Days after the Fed cut the rate, French bank Societe Generale revealed that one trader, Jerome Kerviel, had accumulated losses of over $7 billion in a series of derivatives transactions.

The markets refused to calm down. In an effort to reassure jittery investors, on January 30, the American central bank cut the Fed Funds rate once more, by 50 basis points, to 3%.

As Johan Van Overtveldt notes in his book ‘Bernanke’s Test: Ben Bernanke, Alan Greenspan and the drama of the central banker’: “The combined reduction of the federal funds rate by a hundred and twenty five basis points in just one week represented the most dramatic easing of monetary policy in more than a quarter of a century.”

Those interest rate cuts, were, of course, the first steps by the Federal Reserve to fight off what eventually snowballed into a global financial crisis. Eventually, the Fed had to resort to all sorts of measures, including some highly controversial, unconventional ones, such as quantitative easing, to prevent the US economy from flat-lining.

[Image Credit]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s