Fed set for big rate cut amid market turmoil

The U.S. Federal
Reserve is expected to slash interest rates by as much as whole percentage
points at its policy meeting on Tuesday as investors warily await investment
bank results that could aggravate fears of a full-blown markets crisis.

Traders expect the Fed
to cut rates by a full percentage point in an effort to stop hemorrhaging in
financial markets and boost the flagging economy.

The Fed has cut overnight
rates by 2.25 percentage points to 3% since mid-September as a rise in defaults
on subprime mortgages has escalated into a financial crisis that this weekend
claimed one of Wall Street’s most venerable firms, investment bank Bear
Stearns, as a victim.

While financial
markets expect the Fed to fire off its biggest rate cut since 1982, they might
focus more on the quarterly results due hours earlier from Goldman Sachs Group
Inc, the most profitable U.S.
investment bank, and Lehman Brothers Holdings Inc, the fourth-largest.

The banks are expected
to show how badly they were hit by the credit crunch in the three months ended
February 29 — and any major shocks could send markets into another tailspin,
especially given the vulnerability of the financial sector exposed by the fire
sale of Bear Stearns to JPMorgan Chase.

The Fed has already
taken 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 points.

The U.S. central
bank also unleashed a barrage of other unorthodox steps to provide liquidity,
including $30bln 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.