Hope of Fed interest rate cut reverses sentiment

Global equity markets remained tense yesterday, as investors searched for clues that the US Federal Reserve will soon cut interest rates.

Sentiment on world markets turned around after an influential US senator fuelled expectations that the Fed would opt for an early cut in its main interest rate.

Christopher Dodd, the chairman of the Senate banking committee, told reporters after a meeting with Fed chairman Ben Bernanke and Henry Paulson, US treasury secretary, that Mr Bernanke had told him he would use "all the tools" at his disposal to contain market turmoil and prevent it from damaging the economy.

The revelation helped reverse investor sentiment, which had been deflated by an earlier warning by Mr Paulson that there was no quick solution to the problems in credit markets.

Mr Dodd said Mr Bernanke also indicated that he was not satisfied with the market's response to the Fed's decision on Friday to make direct loans available to banks on attractive terms through its discount window.

The meeting of the three men on Capitol Hill highlights the increasing political pressure on the Fed.

Fed sources played down the significance of Mr Dodd's remarks, indicating that there was no change in Fed policy since Friday, when it put out a statement saying it was "prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets".

The Fed was not expecting market conditions to improve dramatically following Friday's move, so it will not be too disheartened by the mixed developments since then.

Nonetheless, Mr Dodd's comments helped sustain a pull-back in the short-term government debt market, where investors had pushed yields down to remarkable lows amid a desperate scramble for safe government paper.

"Credit is being repriced, reassessed across our capital markets," Mr Paulson told CNBC television. "As the Fed addresses liquidity this makes it possible, this makes it easier, for the market to focus on risk and pricing risk. This will play out over time."

Conditions on equity markets remained on a knife-edge. By midday in New York, the S&P 500 index was up 0.4 per cent at 1,451.59, while in Europe leading shares ended the day flat after a late rally. Shares in Asia, however, continued to rally from last week's rout.

It was the second calm day in a row on the Iseq index of Irish shares and the third consecutive day that the index finished higher than the day before.

The Irish market clawed back almost half a per cent yesterday, similar to Friday's and Monday's result. But investors will have to wait for a more convincing recovery of its recent losses.

The Iseq is still down almost 8 per cent since the credit crisis hit financial markets almost a fortnight ago.

In other moves yesterday, the Bank of England disclosed it made an emergency £314 million loan to an unidentified party on Monday through its standing facility, which allows banks to borrow unlimited amounts at a penalty rate of 6.75 per cent.

It is the first time the facility has been tapped since the onset of the liquidity crisis in financial markets. -