The last time that the US Federal Reserve cut interest rates by three quarters of a percentage point or more in one go was in August 1982. Back then the global economy was enveloped in a thick cloud of misery. Total US economic output had fallen by 7.5 per cent over the previous year and unemployment had risen to its highest level since the Great Depression.
The last time the Fed cut rates at an emergency meeting outside its regular schedule of policymaking gatherings was on the first day that markets resumed trading after the September 11 terrorist attacks. Markets had been closed for four straight days and the fear of dislocation caused by the attacks forced the Fed to cut rates to stave off what many feared would be a global financial and economic panic.
Yesterday the Fed uprooted both of those landmarks. It cut its key federal funds rate at a hastily convened emergency meeting by three quarters of a point to 3.5 per cent.
Putting yesterday’s almost unprecedented move in this historical context gives some idea of the concern at the US central bank about the outlook for the economy. But the timing of this extraordinary rate cut also raises a serious question for the Fed’s credibility: did the leadership of the world’s most powerful central bank panic in response to a financial market crisis?