Bernanke's Push for Global Cut Began With Trichet, King Talks

By Scott Lanman

Oct. 9 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's push for the broadest coordinated interest-rate cut in history started with a weekend of telephone conversations with Jean-Claude Trichet and Mervyn King.

Calling from his Washington office on Oct. 4 and Oct. 5, Bernanke broached the idea with Trichet, the European Central Bank president, and King, the Bank of England governor. The talks culminated Oct. 7 in a conference call where they privately hammered out details of the unprecedented move. Also on the line were central bank chiefs in Canada and Japan.

Twenty-four hours later, the plan came to fruition when policy makers announced half-point reductions aimed at easing the financial crisis. Bernanke's work behind the scenes over those four days illustrates that the ties he's forged with counterparts abroad are helping decisions keep pace with changing economic fortunes.

``It's less difficult than it might seem because there's such continuous communication going on,'' said former Fed Governor Laurence Meyer, who served at the central bank from 1996 to 2002. ``It wasn't something that a snap judgment had to be made about.''

Hours after Bernanke gave a speech Oct. 7 signaling rates may need to go lower, Fed governors, regional-bank presidents and their top advisers gathered in their videoconference rooms across the country at 5:30 p.m. New York time for an emergency meeting.

Ninety minutes earlier, the Dow Jones Industrial Average had ended down 5.1 percent for the day, the fifth straight day of losses.

Plosser Traveling

Some Fed officials found themselves out of their usual zones: Philadelphia Fed President Charles Plosser, who was in New York for a speech the next morning, sat in on the 12th floor of the New York Fed's offices with its President Timothy Geithner and other officials.

First, William Dudley, the New York Fed's executive vice president for markets, briefed officials, followed by Fed Board staffers with an updated economic forecast. Bernanke then skipped the usual roundtable discussion on regional economies and moved straight to discussion of the proposed joint move.

The Federal Open Market Committee vote was unanimous.



Yesterday's move represents closer coordination among central banks than the rate cut in the aftermath of the 2001 terrorist attacks, when a half-point reduction by the Fed was later followed by the ECB, Canada, Switzerland and Sweden.

`Intimate' Cooperation

Then-Chairman Alan Greenspan said during the conference call for the September 2001 emergency rate cut that the other central bankers he spoke with were ``acutely sensitive to what we are going to be doing today, tomorrow, and the next day.''

Yesterday, it was the Fed, the ECB, the Bank of England, Bank of Canada and Sweden's Riksbank reducing their benchmark rates by half a percentage point. The Bank of Japan supported the action, Switzerland also took part and China's central bank separately cut its key rate 0.27 percentage point.

After the announcement, Trichet said it was important the world understand that central banks will act in unison. ``It was appropriate to give a very powerful signal of confidence and of intimate cooperation,'' Trichet said in a Bloomberg Television interview.

Not all central bankers have been keen to cut rates in recent months. Until last week the ECB had been focused on returning inflation below its 2 percent limit with Trichet arguing as recently as mid-September that his economy was in a temporary ``trough.''

That view began to soften when European banks such as Fortis started to get engulfed in the crisis, requiring government help. Trichet shifted gears on Oct. 2 by saying policy makers had begun to consider cutting interest rates. He also hinted the bank was open to acting even before its governing council next convenes Nov. 6.

Bernanke Saw Opportunity

Those words opened the door for Bernanke, 54, to consider the coordinated rate reduction.

Congress' Oct. 3 approval of financial-rescue legislation authorizing the Treasury Department to spend $700 billion on distressed assets failed to halt a worldwide rout in stocks.

The next day, Bernanke began speaking about a possible move with King, 60, a former academic himself who taught at the London School of Economics, and Trichet, 65, who was previously France's chief central banker and a top finance official.

The three had numerous conversations with each other over the weekend and continued on Oct. 6, each coming to the view that a rate cut would be useful.

At 6 a.m. New York time the next day, Bernanke, Trichet and King were joined on a call by Masaaki Shirakawa, head of the Bank of Japan, and Bank of Canada Governor Mark Carney. They discussed a Fed-drafted joint statement and collaborated on changes.

Economists said the first cut may be followed by more, if needed.

``I don't rule out the idea of coordinated rate cuts from the same group of central banks further out in the future,'' Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc., said in a Bloomberg Television interview. ``Pretty much everything is on the table here.''

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net