World financial news

The Federal Reserve seems likely to stop short of lowering interest rates on Tuesday, but could signal a willingness to do so soon as it seeks to settle financial markets jolted by the bankruptcy of Lehman Brothers Holdings Inc.

Through last week, markets had seen almost no chance of a rate cut at Tuesday’s policy-setting meeting. However, Lehman’s downfall further roiled already unsettled markets, and futures prices on Monday implied as much as a 92 percent chance of a cut before settling down to around 60 percent by midday.

“While we would not rule out an emergency Fed cut entirely, we think it is more likely that the Fed will use other policy tools — as it is doing — to contain the situation unless events take another turn for the worse,” analysts at Goldman Sachs wrote in a research note on Monday.

The central bank will announce its decision on interest rates at around 2:15 p.m. EDT on Tuesday.

The Fed has brought down benchmark lending costs to a low 2 percent in seven moves since mid-September 2007 through the end of April to buffer the economy from the impact of the severe housing downturn and a freezing of credit markets.

It has held rates steady at that level since then as worries grew over high inflation and a view took hold that financial markets needed extended opportunities for borrowing, not lower rates, to regain balance payday loans. If anything, the Fed had signaled until recently that its next move would likely be rate increases as markets resumed normal functioning.

SCRAMBLE FOR CASH

But after a whirlwind weekend that brought Lehman’s bankruptcy filing, news that Bank of America was taking over investment bank Merrill Lynch and a scramble by insurance giant American International Group to come up with more cash, the Fed may give a fresh look to its bluntest policy weapon to give the economy a lift. 

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