Wall Street eyes Fed rate cut amid bank crisis

16 September 2008 17:48  [Source: ICIS news]

WASHINGTON (ICIS news)--The US Federal Reserve Board may cut its key federal funds interest rate when it meets later on Tuesday, market watchers said, in an effort to stem the US banking and investment crisis that has rattled the global economy.

 

Further US government intervention in the ongoing crisis was suggested on Tuesday when Treasury Secretary Henry Paulson cancelled a speech on the economy he was scheduled to give at the Brookings Institution on Tuesday afternoon.

 

Sources said Paulson had to skip the Brookings appearance in order to keep his hand on the fast-changing financial crisis.

 

However, market mood appeared to calm at midday on Tuesday with word that UK bank Barclays has agreed to buy the investment banking business of Lehman Brothers, which filed for federal bankruptcy protection on Monday.

 

The Dow Jones Industrial Average was down by only 18 points at noon on Tuesday, a very modest change compared with the 504-point plummet the Dow saw on Monday in the wake of the Lehman bankruptcy and the sale of Merrill Lynch to Bank of America.

 

Speculation was widespread that Paulson was involved in a federal and private sector effort to stave off collapse of insurance and financial services giant American International Group (AIG).

 

The Fed - the US central bank - was scheduled to hold a regular rate-setting conference on Tuesday, but the coincidental timing of that meeting with the ongoing financial crisis raised expectations on Wall Street that the Fed might move to cut interest rates.

 

A principle result of the ongoing banking and financial crisis would be ever-tightening credit conditions for business, both in the US and abroad. 

 

If manufacturers and other businesses are unable to get credit for expansion and operations, the economic malaise that has affected the US for a year and has spread abroad could get worse, sources said.

 

To help ease credit availability, sources speculated, the Fed might knock 25 or even 50 basis points off the already low 2% rate for its key federal funds facility.

 

The Fed decision is expected at 14:15 hours New York time (18:15 GMT) on Tuesday.

 

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By: Joe Kamalick
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