Reuters - Fed poised to slash rates as jitters ease

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Fed poised to slash rates as jitters ease

Tuesday, Mar 18, 2008 1:41PM UTC

By Mark Felsenthal and Christian Plumb

WASHINGTON/NEW YORK (Reuters) - U.S. Federal Reserve policy-makers opened a meeting on Tuesday that was expected to lead to the biggest interest rate cut since 1982 as two major Wall Street firms provided some relief to investors with better-than-expected earnings.

Goldman Sachs Group Inc and Lehman Brothers Holdings Inc on Tuesday reported that profits fell less sharply than feared, boosting U.S. stock markets ahead of an expected one percentage point cut in interest rates by the Fed.

The absence of shocks from two of the four biggest investment banks calmed nervous investors only two days after the fifth-biggest bank Bear Stearns was forced to sell itself to JPMorgan Chase & Co in a rescue deal engineered by the Fed.

Goldman said first-quarter earnings fell by half after the largest U.S. investment bank recorded steep losses on corporate loans and other assets, yet the results exceeded expectations that have been lowered in recent weeks.

Lehman Brothers, whose shares have been pummeled in recent days on concern that it is the most vulnerable to troubled mortgages and leveraged loans next to Bear Stearns, suffered a sharp fall in bond trading revenue but benefited from rising merger advisory revenue.

Traders expect the Fed to slash rates in an effort to stop hemorrhaging in financial markets and boost the flagging economy. The Fed is expected to announce its decision around 2:15 p.m..

The Fed has cut overnight rates by 2.25 percentage points to 3 percent since mid-September as a rise in defaults on subprime mortgages has escalated into a financial crisis.

Financial markets expect the Fed to fire off its biggest rate cut in 26 years, adding to a series of radical steps in an attempt to stabilize the financial system.

It narrowed the gap between the discount rate -- the rate at which it lends directly to banks -- and the federal funds rate, the overnight rate banks charge each other for loans and the Fed's main policy tool, from three-quarters of a percentage point to a quarter point.

The U.S. central bank also unleashed a barrage of other unorthodox steps to provide liquidity, including $30 billion in financing to enable JPMorgan to buy Bear Stearns. In addition, it set up a new program to provide cash to a wider range of big financial firms through loans at the Fed's discount window.

INFLATION ON BACK BURNER

Against the market upheaval, fears that a seizing up of the financial system could plunge the U.S. economy into deep recession have overtaken worries about inflation fueled by high oil and commodity prices.

"With the recent market turbulence, those inflation concerns are now taking a backseat, and the (Fed) has to think about the action that not only is appropriately aligned with the forecast but that also supports financial markets at a time of extraordinary turbulence and systemic risk," Laurence Meyer, a former fed governor now with forecasting firm Macroeconomic Advisers, said in a note to clients.

The Fed has focused efforts in recent days on surprise steps to make funds available to banks and Wall Street firms, offering hundreds of billions of dollars in auctions and credit to thaw frozen credit markets.

Policy-makers may have hoped that recently announced emergency actions would remove the need for a deep interest rate cut. However, officials will have to take stock of gloomy data on hiring, factory output and retail sales.

(Editing by Tom Hals)