Market Features
Market Awaits More Fed Rate Cuts
03/18/08 - 12:51 PM EDT
Updated from March 17 The Federal Reserve is expected to announce more cuts to its key interest rate target Tuesday, one day after the central bank managed to stabilize the stock market as investors struggled to comprehend the stunning collapse of a major Wall Street investment bank. The Fed, with the help of JPMorgan ChaseJPM, helped Bear Stearns BSC avoid bankruptcy over the weekend and helped inject liquidity to seized credit markets by allowing investment banks to borrow direct funds in a historic break with nearly a century of policy. Now, investors are betting that the Fed will slash its federal funds rate target by a full percentage point, from 3% to 2%. Having already slashed 225 basis points from the target since the credit crisis emerged last summer, some observers are wondering if it can ever restore confidence to financial markets with monetary policy, but Wall Street is clamoring for the Fed to try. "This is like treating a patient that has a gunshot wound," says Ethan Harris, senior economist with Lehman Brothers, "You have to go all out to save the patient. Whether or not the patient could survive without the Fed, I'm not sure." The Fed's aggressive tactics in aiding Wall Street during this crisis face withering scrutiny from critics who see its willingness to bail out Bear Stearns and other investors as a move that will distort incentives by tinkering with the free markets. LEH -- are experiencing liquidity problems. Investment banks and other financial institutions are loaded with mortgage-backed securities whose value are a mystery amid historic declines in the U.S. housing market and spiking mortgage delinquencies and foreclosures on markets around the country. Meanwhile, the Fed's critics point to the value of the U.S. dollar, which is plunging against foreign currencies as the central bank pumps fresh liquidity into the financial markets, tempting inflationary pressures.
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