By Scott Lanman Oct. 8 (Bloomberg) -- The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression. The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point. ``We are now looking at the first page of the global- depression playbook,'' said Carl Weinberg, chief economist at High Frequency Economics LLC in Valhalla, New York. ``The only solution is to cut rates as close to zero as you dare,'' pump money into the banking system ``hand over fist'' and increase government spending, he said. Today's decision follows a global meltdown that sent U.S. stock indexes heading for their biggest annual decline since 1937; Japan's benchmark today had the worst drop in two decades. Policy makers are also aiming to unfreeze credit markets after the premium on the three-month London interbank offered rate over the Fed's main rate doubled in two weeks to a record. Rate Levels The Fed reduced its benchmark rate to 1.5 percent. The ECB's main rate is now 3.75 percent; Canada's fell to 2.5 percent; the U.K.'s rate dropped to 4.5 percent; and Sweden's rate declined to 4.25 percent. China cut interest rates for the second time in three weeks, reducing the main rate to 6.93 percent. Stocks at first rallied after the announcement, then turned lower before rising again. Some analysts said the central banks should have lowered rates by more, and predicted further reductions. Economists at Goldman Sachs Group Inc. and Morgan Stanley now project another half-point move by the Fed at its Oct. 28-29 meeting. The Standard & Poor's 500 Stock Index rose 1 percent to 1,006.63 at 10:17 a.m. in New York, after plummeting 15 percent in the past five trading days. Europe's Dow Jones Stoxx 600 Index slumped 3.9 percent after a drop of as much as 7.8 percent. Japan's Nikkei 225 Stock Average lost 9.4 percent to 9,203.32 earlier today, before the announcement. ``The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,'' the central banks said in a joint statement today. ``Some easing of global monetary conditions is therefore warranted.'' World Recession Global policy makers are reducing rates as economies weaken around the world. The International Monetary Fund said the global economy is heading for a recession in 2009 and increased its estimate of losses from the financial crisis to $1.4 trillion. The crisis already prompted the U.S. to enact a $700 billion program to buy troubled assets from banks in an effort to prop them up. U.K. banks will get a 50 billion-pound ($87 billion) government bailout, while Spain will spend as much as 50 billion euros to buy bank assets. European governments have also moved to rescue banks Fortis, Dexia SA and Hypo Real Estate Holding AG. The Fed's Open Market Committee, which voted unanimously for today's move, said in its statement that ``incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial-market turmoil is likely to exert additional restraint on spending.'' Europe's Reversal European policy makers were forced into action after the collapse of Lehman Brothers Holdings Inc. last month roiled world financial markets and caught them off guard. The ECB raised rates in July and Bank of England Governor Mervyn King warned the government as recently as Sept. 16 that inflation was set to accelerate. The decision to let Lehman go ``had enormous, very unfortunate consequences,'' European Central Bank President Jean- Claude Trichet said Oct. 2. On the same day, he signaled the ECB was ready to cut rates. Today's action comes a day after Fed Chairman Ben S. Bernanke failed to assuage investors' concerns about the deteriorating economy by signaling he was ready to lower borrowing costs. Fed officials, who have kept their benchmark rate at 2 percent since April, may have wanted time for their record loans to the financial industry and new programs, including purchases of commercial paper, to bear fruit before lowering rates. Investors instead perceive the economic outlook deteriorating more rapidly, necessitating rate reductions. Emergency Actions The declines in U.S. shares the past two days followed pre- market opening announcements of fresh actions by the Fed to unblock credit markets. On Oct. 6, the U.S. central bank doubled its planned auctions of cash to banks to as much as $900 billion. Yesterday, it unveiled a unit to buy commercial paper, debt used by companies for short-term funding. Central bankers acted two days before they gather with finance ministers from the Group of Seven industrial nations in Washington. The timing suggests the central banks sought to avoid any appearance of being influenced by governments, said Ted Truman, former chief of the Fed's international-finance division. ``It was clear that if they wanted to do it, they had to do it before Friday,'' said Truman, now a senior fellow at the Peterson Institute for International Economics in Washington. ``they don't want to see as being coordinated by their finance ministers into doing this.'' Bernanke Message Bernanke said in a speech yesterday that an intensifying credit crunch means officials must ``consider'' lowering borrowing costs. In more typical market conditions, stocks rally when a Fed chief indicates he'll reduce rates. Now, Bernanke's message may have less power because traders already anticipated for weeks that policy makers would need to make that move, and because of rising concern even rate cuts may do little to immediately help banks scrambling to reduce their vulnerability to loan losses. ``This is an extraordinary circumstance,'' said Former Fed Governor Laurence Meyer, now vice chairman of Macroeconomic Advisers LLC. ``If markets are totally frozen it doesn't help. It certainly builds confidence psychologically.'' To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net

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