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Fed battles to restore confidence US Treasury admits US in downturn
(about 2 hours later)
The US central bank is expected to slash interest rates on Tuesday to help boost confidence in the US economy. US Treasury Secretary Hank Paulson has admitted that the US economy is facing a "sharp decline" at the moment but hoped for a recovery later in the year.
Economists are forecasting that the benchmark US interest rate will be cut by up to 1%. The decision will be announced at 1815 GMT (1415 EST). The news comes after the US central bank, the Federal Reserve intervened to rescue troubled bank Bear Stearns, providing $30bn in emergency support.
Policy makers are hoping to ease the credit crisis which caused the emergency sale of investment bank Bear Stearns over the weekend. Mr Paulson said that he did not believe investors saw the move as a bail-out.
Investors will also be watching results from Lehman Brothers and Goldman Sachs. The Fed is expected to slash interest rates later on Tuesday to help boost confidence in financial markets.
Both banks are expected to announce a sharp fall in profits, when they report results later on Tuesday. More rate cuts
We know we're in a sharp downclimb and there's no doubt that the American people know that the economy has turned down Hank Paulson, US Treasury Secretary Economists are forecasting that the benchmark US interest rate will be cut by up to one percentage point to 2%. The decision will be announced at 1815 GMT (1415 EST).
It would be the fifth rate cut since the credit crunch started.
Mr Paulson has been touring the US breakfast television studios in an attempt to reassure markets and consumers about the economic situation.
"We know we're in a sharp downclimb and there's no doubt that the American people know that the economy has turned down," he said.
He said that policy was focused on calming the financial markets.
"The big focus on the part of all policy makers is to minimise the spillover to the real economy," he added.
Slowing economy
Mr Paulson declined to use the word recession to characterise the US economy, but recent polls of both economists and the public have revealed that they disagree.
The latest economic figures to suggest a sharp slowdown were the industrial production figures, published on Monday, which fell by 0.5% in February.
US job growth was also negative in February, but Mr Paulson said he expected the economic package and further rate cuts to lead to 500,000 more jobs this year.
MAIN SUB-PRIME LOSSES SO FAR Citigroup: $18bn Merrill Lynch: $14.1bnUBS: $13.5bn Morgan Stanley $9.4bn HSBC: $3.4bnBear Stearns: $3.2bn Deutsche Bank: $3.2bn Bank of America: $3bnBarclays: $2.6bn Royal Bank of Scotland: $2.6bn Freddie Mac: $2bnJP Morgan Chase: $3.2bn Credit Suisse: $1bn Wachovia: $1.1bn IKB: $2.6bn Paribas: $197mSource: Company reports Timeline: Sub-prime crisisQ&A: Bear Stearns crisisMAIN SUB-PRIME LOSSES SO FAR Citigroup: $18bn Merrill Lynch: $14.1bnUBS: $13.5bn Morgan Stanley $9.4bn HSBC: $3.4bnBear Stearns: $3.2bn Deutsche Bank: $3.2bn Bank of America: $3bnBarclays: $2.6bn Royal Bank of Scotland: $2.6bn Freddie Mac: $2bnJP Morgan Chase: $3.2bn Credit Suisse: $1bn Wachovia: $1.1bn IKB: $2.6bn Paribas: $197mSource: Company reports Timeline: Sub-prime crisisQ&A: Bear Stearns crisis
Lehman Brothers shares plunged 20% on Monday, its biggest ever one-day fall.
Investors were panicked by the sale of rival investment bank Bear Stearns over the weekend.
It faced bankruptcy when clients lost confidence in the firm and started to withdraw funds.
Many consider the $240m (£120m) price tag paid by JP Morgan Chase to be a bargain.
The US Federal Reserve has been trying to restore confidence in the banking business.The US Federal Reserve has been trying to restore confidence in the banking business.
It has already cut interest rates from 5.25% to 3% since mid-September in a bid to boost the economy.It has already cut interest rates from 5.25% to 3% since mid-September in a bid to boost the economy.
Banks have been unwilling to lend to each other because they are worried about losses on investments backed by US mortgages.Banks have been unwilling to lend to each other because they are worried about losses on investments backed by US mortgages.
Those investments have been hit by the slump in the US housing market.Those investments have been hit by the slump in the US housing market.
To help restore confidence economists expect the Fed to cut the benchmark, Fed funds rate, by between 0.75% and 1%.To help restore confidence economists expect the Fed to cut the benchmark, Fed funds rate, by between 0.75% and 1%.
"There is no reason for the Fed not to be aggressive," said Mark Zandi, chief economist at Moody's Economy.com."There is no reason for the Fed not to be aggressive," said Mark Zandi, chief economist at Moody's Economy.com.
"The economy is in a recession, the financial system is in disarray and inflation is low," he added."The economy is in a recession, the financial system is in disarray and inflation is low," he added.
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