All eyes fixed on Federal Reserve



The Federal Reserve is expected to aggressively lower interest rates in its intensified battle against the U.S. credit crisis and spreading economic weakness. The question is whether all of the effort will turn the tide.

Federal Reserve Chairman Ben Bernanke and his colleagues have already been working overtime, employing a variety of novel approaches to keep the economy out of a recession or at least moderate the impact of any downturn.

More relief is expected Tuesday when the central bank is expected to cut a key interest rate by between one-half and a full percentage point.

"There is no reason for the Fed not to be aggressive," said Mark Zandi, chief economist at Moody's "The economy is in a recession, the financial system is in disarray and inflation is low."

On Monday, Wall Street ended a temperamental session widely mixed as investors grappled with JPMorgan Chase & Co.'s government-backed buyout of the stricken investment bank Bear Stearns & Co.

"Our priority right now is to do what's in the best interests for the American people, and that is to minimize the impact of this slowdown in our economy, and again, to keep our capital markets functioning in the way they need to function," U.S. Treasury Secretary Henry Paulson told CBS News'

The Early Show


The Dow Jones industrials

of nearly 200 points to finish up about 21 points. The broader Standard & Poor's 500 and Nasdaq composite indexes ended lower as investors bailed out of investment banks and small-cap stocks and fled instead to large companies apt to be reliable during a weak economy.

The federal funds rate, the interest that banks charge each other on overnight loans, currently stands at 3 percent, down from 4.25 percent at the beginning of this year. That was before global market turmoil in January prompted an emergency three-quarter-point cut on Jan. 22 and a half-point move eight days later, the biggest reductions in a single month in more than a quarter-century.

Many economists believe the Fed will deliver another three-quarter-point cut or perhaps even a full one-point reduction at Tuesday's meetings because Fed officials will not want to disappoint fragile financial markets, which have been on a rollercoaster ride in recent days as they have watched Bear Stearns, the fifth largest U.S. investment house, suddenly be brought down by the equivalent of a run on the bank.

JPMorgan stepped in to announce it was purchasing Bear Stearns at a fire-sale price on Sunday in a deal helped along with a pledge that the Fed would supply a $30 billion line of credit to back up Bear Stearns' assets.

That offer over the weekend was the latest move by a central bank that has been pulling out all of the stops, including using procedures from the Depression era of the 1930s, to pump cash into the financial system. Analysts, who faulted Bernanke for being slow to recognize the gravity of the situation last year, now give him high praise for bringing all the Fed's powers to bear.

"The Fed is doing what it can to come to rescue an economy that faces potentially a huge meltdown in financial markets," said Lyle Gramley, a former Fed governor and now an analyst with Stanford Financial Group. "The Fed is acting as a lender of last resort and being very aggressive and innovative."

In addition to providing support for the Bear Stearns sale, the Fed also announced Sunday one of the broadest expansions of its lending authority since the 1930s, saying it would allow securities dealers for at least the next six months to borrow directly from the Fed. That privilege, until now, had been confined to commercial banks.

At the same time, the Fed announced it was cutting the interest rate on those direct loans from the Fed, through a facility known as the Fed's discount window, by a quarter-point to 3.25 percent.

In other moves, the Fed last week announced that it would lend up to $200 billion of Treasury securities that it owns to investment banks starting March 27 for a period of up to 28 days in return for a like amount of the investment banks' shunned mortgage-backed securities. The Fed also announced recently that it was boosting the size of special loans it has been making since December to commercial banks.

The scale of these actions underscored the threat facing the economy from a severe credit squeeze that began with a wave of defaults on subprime mortgages last year but has now spread to other parts of the credit markets, triggering multibillion-dollar losses by some of the country's largest financial institutions.

Analysts said it will take some time to determine whether the Fed has done enough to stem the wave of panic among investors.

The rapid decline of Bear Stearns stock - which had a market value of about $20 billion in January, only to collapse to a sales price of $2 per share, or about $236 million, this past weekend - has given investors the chills.

"The Fed is trying very hard to figure out how to calm the markets down, but so far it hasn't been very successful," said David Wyss, chief economist at Standard & Poor's in New York. "Markets are worried that there might be another Bear Stearns out there."

Paulson told the The Early Show that the priority of the administration is to have stable, orderly financial markets, that are very important to the health of the economy as well as to the American people.

"And the focus of policy makers is on reducing the spillover into the real economy," says Paulson.

World stocks mostly rose Tuesday following sharp declines the day before, though gains were limited ahead of a key U.S. central bank meeting later in the day.

In Asia, stocks rose in Japan, Hong Kong and South Korea. China's two stock indices, however, declined sharply.

The advances came after Wall Street eked out a gain of 0.18 percent Monday, its first session after the weekend announcement that JPMorgan Chase was acquiring troubled U.S. investment bank Bear Stearns. That news had earlier caused markets in Asia and Europe to tumble on worries about the health of the U.S. financial system.

In Tokyo on Tuesday, stocks rallied to break a three-day losing streak, as bargain hunters injected some life back into markets battered the day before by a falling dollar.

The benchmark Nikkei 225 Stock Average rose 1.5 percent to 11,964.2 after a 450-point drop Monday. South Korea's main stock benchmark rose 0.9 percent, while Hong Kong's Hang Seng index gained 1.4 percent.

European stocks, meanwhile, rose in morning trade, with U.K.'s FTSE 100 rising 1.6 percent, France's CAC-40 Index gaining 1.7 percent and Germany's DAX Index rising 1.6 percent.

Posted by KO

The Associated Press and CBS News contributed to this report.