New York/Singapore - The US Federal Reserve looks to halve interest rates close to zero on Tuesday and China signalled it may cut its rates again in a global drive to contain the worst financial crisis in 80 years.
Central bankers return to centre stage in an action packed week that started on a sour note with a rescue plan for US carmakers stuck in limbo, reverberations of an alleged multibillion financial fraud and a collapse in Japanese business sentiment.
Still to come is the possibility that the Bush administration could approve a bailout for the automakers as early as Wednesday, results from Goldman Sachs, which may report on Tuesday its first quarterly loss as a publicly traded company, and a Bank of Japan policy meeting.
The Federal Reserve is expected to cut its benchmark rate to 0.5 percent, its lowest in more than half a century, and to promise to dip into its toolbox for less conventional tools to pull the world's biggest economy out of recession.
Japan's financial strains
In Japan, where rates are already at an ultra-low 0.3 percent and the economy is possibly poised for its longest ever slump, the finance minister urged the central bank to also take unorthodox steps to ease a funding crunch faced by Japanese companies.
Bank of Japan holds its policy meeting on Thursday and Friday and there is some market speculation it may cut interest rates after it reported the biggest crash in business sentiment in three decades.
But the Nikkei newspaper said many within the central bank were reluctant to drive rates any lower and wanted to wait for the effects of the last cut in October, of just 0.2 percentage point, to work their way through the economy.
Japanese media reported that the central bank is considering buying commercial paper directly from companies to ease their financing strains.
China's central banker sees rate-cut pressure
China's Central bank governor Zhou Xiaochuan also left the door open to more easing after China slashed its rates by more than a full percentage point last month, saying it would depend on inflation in the months ahead.
Zhou said on Tuesday that slowing inflation in China gave the bank room to lower borrowing costs. "Consumer prices are going down, and sometimes even faster than we think," he said.
Zhou said he sees pressure to cut interest rates from now until the beginning of next year as growth slows amid a drop in exports.
The global financial crisis has caused the world's fourth- largest economy to cool, "especially Chinese exports to other part of the world," Zhou said in Hong Kong, where he is attending a regional meeting of the Financial Stability Forum. "From now until the beginning of next year is full of interest-rate cut pressure."
The severity of the global downturn set off by a US sub-prime mortgage market meltdown last year surprised policymakers, who have been running out of options after slashing rates to historic lows and rushing out massive stimulus plans.
Among the world's top economies only China has avoided recession, but it risks a sharp slowdown that may feel like one, and the authorities in Beijing are scrambling to engineer a soft landing with a mix of massive government spending and interest rate cuts.
Economists now expect the US Federal Reserve to acknowledge it will have to resort to direct purchases of government and mortgage-related debt and possibly massive money injections of the sort Japan used in the 1990s to revive its deflation-ridden economy.
Asian shares tracked Wall Street lower, with the weakening of the dollar in anticipation of the Fed cut and subsequent yen strengthening hurting Japanese exporters such as Honda Motor.
"While an additional rate cut by the Fed is widely expected, market reaction to the cut is still very much uncertain, as another cut means the Fed is left with one less card to offer," said Lim Tae-gun, an analyst at Daewoo Securities in Seoul.
Tokyo's Nikkei Average was down 0.9 percent, though shares in Seoul edged up, as carmakers gained on hopes the White House will engineer a rescue for the troubled "Big Three" carmakers.
US Car Makers Struggle
President George W. Bush on Monday dashed hopes that the White House would quickly announce an alternative plan to the US$14 billion bailout killed in the US Senate on Friday. But sources said later the Bush administration could approve an automaker bailout from its bank rescue fund as early as Wednesday.
Investors fear that the domino effect of the collapse of US carmakers would hit companies all along the supply chain, wiping out millions of jobs in the United States and around the world and dealing another body blow to the struggling industry.
US, Japanese, German and French carmakers have been slashing earning forecasts and jobs in the face of a slump in world wide demand.
Japan's Toyota Motor Corp, the world's biggest auto maker, said weaker demand had prompted it to suspect a project with truck maker Isuzu Motors to develop diesel engines and the Nikkei reported it was pushing for cheaper steel prices from supplier Nippon Steel Corp.
On Monday, Toyota said it was putting on hold indefinitely work on a new car plant in the United States.
There was no reprieve for banks either.
The industry, whose heavy losses from toxic US housing debt set off the spiral of financial turmoil that escalated into a full-blown global economic downturn, made headlines again due to several banks' exposure to an alleged $50 billion Wall Street fraud by investor Bernard Madoff.
Among those affected were Britain's HSBC Holdings Plc, Royal Bank of Scotland and Man Group, Japan's Nomura Holdings and France's Natixis SA.
No major US banks have said they were exposed, but the Madoff scandal did take a toll on US stocks along with worries about bank profits.