Plummeting markets look for interest rate cuts, and soon

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With global stock markets in another meltdown today, investors are looking for governments to fire the one big weapon they’ve kept in reserve: interest rate cuts.

‘The only thing left is a coordinated rate cut’ by major central banks, said Todd Leone, a stock trader at Cowen & Co. in New York.

But some analysts aren’t sure the Federal Reserve and other central banks are ready to act today -- even with the extreme destruction done to stock prices, as worries about the global credit crunch have continued to deepen.

At about 11:15 a.m. PDT, the Dow Jones industrial average was off 655 points, or 6.3%, to 9,669, the low for the session so far.

Most European stock markets were down from 7% to 9% today. All in all, we’re looking at a massive wipeout of wealth in one day.

George Goncalves, fixed-income strategist at Morgan Stanley in New York, said the Fed still is hoping that it can begin to break up the logjam in the credit markets -- and make banks feel better about lending again -- with other tools at its disposal.

The Fed today said it would boost its regular auctions of short-term cash to banks to as much as $900 billion over the next month or so, from the current $450 billion.

The Fed also said it would begin paying interest on reserves that banks are required to keep with the Fed (or hold in their own vaults) beginning on Thursday. Congress gave the central bank that authority in the financial-system bailout bill last week.

The basic idea: It’s another way for the Fed to help bolster banks’ capital, by providing them with an easy, no-risk source of income. At the same time, the Fed gains control over more financial resources that it can then lend out to banks in need.

‘Together these actions should encourage term lending across a range of financial markets in a manner that eases pressures and promotes the ability of firms and households to obtain credit,’ the Fed said in a statement.

But policymakers also hinted at a rate cut, saying they stand ‘ready to take additional measures as necessary to foster liquid money market conditions.’

‘I think they will cut rates, but they’re trying to figure out how to get the biggest bang for the buck,’ said Dominic Konstam, head of interest-rate strategy at Credit Suisse in New York. Waiting until Thursday, when interest payments on reserves will begin, might make the most sense, Konstam said.

Foreign central banks have a lot more room to reduce rates than the Fed does. The European Central Bank’s key short-term rate now is 4.25%, the Bank of England’s rate is 5%, and the Bank of Canada is at 3%.

By contrast, the Fed’s rate is 2%.

Tony Crescenzi, bond market strategist at Miller Tabak & Co. in New York, said he expected the Fed to cut rates on Tuesday if financial markets hadn’t stabilized by then. A cut of as much as one full percentage point could be justified given the severity of the nightmare in the credit markets, he said.

A rate cut of that size would sharply push down bank deposit rates, another blow to savers. Still, with the government about to spend $700 billion to buy bad loans from banks -- in return for equity stakes from the lenders -- one argument for a rate cut is that ‘what is good for banks is good for taxpayers,’ Crescenzi says.