Rates cut and Global show of force.

The co-ordinated rate cuts 8 October 2008 of 0.5% by the Fed, ECB, Bank of England, Bank of Canada, Swiss National Bank and Riksbank are a significant sign of central bank coordination in light of the financial crisis. The 0.27% cut by the People's Bank of China (and 50bp cut in reserve requirements) will be seen by many as a sympathy move in concert with the other central banks.

The European Central Bank trimmed its key rate to 3.75% from 4.25%, and the Bank of England cut its benchmark rate to 4.5% from 5%. The Bank of Japan sat out the move but issued a statement backing the action.

The rate cuts have had an immediate positive impact on risk assets, with equity prices in Europe reversing losses and futures in the US moving higher. That is to be expected, for reasons we outline below. But equally, the coordinated move 'explains' Bernanke's comments from yesterday 7 October 2008, which disappointed markets. The finalization of a joint move was not complete at the time he spoke to the National Association of Business Economists.

We believe easier monetary policy cannot cure what ails the financial system—a shortage of capital. And what today's 8 October 2008 move underscores is that monetary policy coordination—belated though it may have been—is easy compared to the deployment of taxpayer funds to recapitalize banks or fund asset workout entities. Yet the latter are plainly necessary and, indeed, even more important.

The challenge for markets, therefore, is to cope with the seemingly inevitable country-by-country, case-by-case resolution of insolvency pressures in the banking system Finally, however welcome the moves are, they come too late to forestall recessions in the US, UK, Eurozone and Japan—or for that matter, much weaker growth in the emerging complex. Earnings risk, default risk and disinflation will remain key hallmarks of the cycle for considerably longer.

As a consequence, we continue to see further easing from the Fed, Bank of England and ECB in this cycle. We anticipate two more quarter point moves from the Fed before year end, another 0.75% from the ECB and a further 1.25%from the Bank of England in this cycle.

Central banks around the world acted in concert Monday, hoping a 0.5% rate cut would restore confidence to battered markets, WSJ's David Wessel reports. (Oct. 8)

.