Fed Meeting Will Take Center Stage This Week

Long-Term Capital Management’s mess is just a sideshow to the main event: the continuing turmoil in global financial markets.

The Federal Reserve Board gets to show just how worried it is about the situation this week, when it meets Tuesday.

By all accounts, a Fed cut in the federal funds rate, the overnight loan rate among banks (which the Fed controls), is a done deal; Fed Chairman Alan Greenspan all but confirmed that in comments last week. It’s the size of the cut that is the question--a quarter-point, to 5.25%, or a half-point, to 5%?

Reuters reported Friday that the New York Fed was polling Treasury bond dealers about how much of a cut the market expected. Although yields on Treasury securities of all maturities are well below the current 5.5% fed funds rate--which means the market expects a series of Fed cuts over the next six to 12 months--the Fed still has to be careful about its initial move.

A quarter-point cut would be in keeping with Greenspan’s traditional “gradualist” approach. A half-point, however, could suggest the Fed is serious about quickly restoring confidence in the world’s badly shaken financial system.

Many experts say the Fed is worried that Brazil--which holds elections Oct. 4--could devalue its currency shortly thereafter, amid severe economic stress. Significantly lower U.S. interest rates could put some downward pressure on Brazilian rates, reducing the need for a devaluation.

But some economists argue that a half-point cut could send the wrong message--that the Fed is panicked.

The U.S. stock market, at least, wants to believe the worst is over: The market closed higher again last week, with the Dow industrials up 1.7% and the Nasdaq composite up 4.8%.