Weekend's Featured: Fed's Actions Earn Praise But Bring Scrutiny

Fed's Moves to Stabilize Economy Bring Praise, but Also New Scrutiny to Central Bank.

The Federal Reserve has taken its boldest action since the Great Depression, invoking rarely used powers in an effort to contain a panic threatening to undermine the economy. The central bank acted with speed the White House and Congress only could envy. The Fed is largely free from many constraints that bog down other policymakers. Also, it is the only U.S. institution with the authority and ability to create money out of thin air.

For now, the steps orchestrated by Chairman Ben Bernanke, in the first critical test of his leadership since succeeding Alan Greenspan in early 2006, are earning praise from the Bush administration, Congress and presidential contenders Barack Obama, Hillary Rodham Clinton and John McCain.

But the Fed's moves are raising questions about whether its regulatory powers, established in the early 20th century, need overhauling and whether it took on some responsibilities that Congress and the administration should have shouldered.

In a remarkable week, the Fed:
- engineered the fire sale of bankruptcy-headed Bear Stearns Cos. to J.P. Morgan Chase & Co. with a $30 billion loan.
- offered emergency loans to other securities dealers under terms normally reserved for regulated banks.
- slashed a key short-term interest rate by three quarters of a percentage point, to 2.25 percent. The cut was sixth since September.

These steps followed moves to lend $100 billion in cash to banks and $200 billion in Treasury bonds to cash-strapped investment banks. The goal was to keep the financial system from seizing up.

"I spent 35 years on Wall Street, have been a Fed watcher for a long time and I have never seen the potential for a more severe credit crisis than this one," said David Jones, chief economist at DMJ Advisors and a former Wall Street economist. "It looks like we turned the corner precisely because of what the Fed did."

Was this the first look at a more activist Fed or just a targeted response to a looming economic meltdown? Either way, the financial sector and its regulators are expected to come under congressional scrutiny in the days ahead.

Lawmakers from both parties are coming up with suggestions for restructuring the regulation of financial markets. The Treasury Department is working on its own blueprint for change. Rep. Barney Frank, chairman of the House Financial Services Committee, is proposing new regulations on investment banks similar to those that apply to regular banks. That includes mandatory requirements for cash reserves to cushion losses.

Frank, D-Mass., said the Fed or other government entity should be designated as a "financial services regulator" with the power to limit risky practices. White House spokeswoman Dana Perino said the administration would study the concept and other ideas "as we consider if there's additional things that we need to do."

Bear Stearns' unraveling and the credit woes facing other financial companies brought new attention to the Fed, which is part of the government and part of the commercial banking system.

Congress created the Fed in 1913 to prevent financial panics such as runs on banks and set it up as an independent entity. Its powers grew in 1933 and 1935. Although the Fed is subject to congressional oversight, its decisions do not have to be ratified by the president or Congress. Fed officials are not paid with money appropriated by Congress.

It has a seven-member board of governors, led now by Bernanke, and headquarters in Washington. Fed members are nominated by the president and confirmed by the Senate. There are two vacancies currently. The system includes 12 Reserve Banks in major cities. These banks have their own boards of directors, two-thirds of whom are elected by commercial banks in the region and one-third by the Fed board in Washington.

With this combined government-financial industry heritage, the Fed serves as the nation's central bank. It manages the money supply, sets or influences certain key short-term interest rates, engages in open market buys and sales of government securities, and oversees and provides financial services to banks.

Because of the Fed's direct influence over interest rates, the money supply, and the larger economy, some have called the Fed chairman the second most powerful job in Washington after the president.

Economist Lawrence Chimerine, president of Radnor Consulting in Philadelphia, faults the Fed, particularly under Greenspan, for not paying more attention to what was happening in mortgage markets and to the rise in subprime lending. He said Bernanke's Fed complicated the situation by "raising rates too much and being too slow to start reducing them."

Still, Chimerine said, "I don't think there's any question Bernanke did the right thing" with the recent moves. "If Bear Stearns had gone bankrupt and if this credit crunch continued to spread, we would have had a real mess."

Alice Rivlin, a former Fed vice chairman, said she does not think Bernanke exceeded his authority, even though he acted under creaky legal provisions not used since the 1930s. "The Fed has been very aggressive and imaginative, and has taken very strong actions to get the credit markets functioning again," she said. "And that's good."

Anthony Ryan, assistant treasury secretary for financial markets, said the current framework for regulating financial institutions "is a reflection of literally decades of evolution. And we have a very fragmented regulatory structure." Before addressing any changes, "we need to continue to make sure we work through the current challenges in the markets. This has to be job one," he said in an interview with C-SPAN to air Sunday. "And the actions by the Federal Reserve to help facilitate orderliness and stability is very, very important."

Risk Culture on Wall Street Not to Change

Culture of Risk on Wall Street Not Seen Changing Amid Bear Stearns Downfall.

Wall Street investment bankers got another lesson about the dangers of risk-taking this past week with the downfall of Bear Stearns Cos. The question now obviously is, how long will it last?

Those bankers, many of whom lived through market debacles like the dot-com bust at the start of this decade, turned out to have very short memories. And so analysts believe the sale of Bear Stearns to JPMorgan Chase & Co. for a stunning $2 per share ultimately won't have that much of an impact on how Wall Street conducts business.

In fact, bankers and traders are under even more pressure to reap big returns because of the ongoing credit crisis, and risk is just part of the game. "There's an old saying on Wall Street that, for traders and bankers, you'd have to take a normal 30 year career and distill it to 15 years," said Quincy Krosby, chief investment strategist for The Hartford. "This whole episode might change Wall Street for a little while."

Krosby believes that Bear Stearns' near-collapse, which followed the company's investing too heavily in risky mortgage-backed securities, might force some bankers to change their ways in the short term. But it won't be enough to temper the financial industry's relentless pursuit of money.

Indeed, the past decade has seen a number of investing fiascoes that Wall Street doesn't appear to have learned much from. Krosby noted the go-go Internet days -- when untested high-tech companies reaped piles of cash in public offerings. The lesson then was, don't put a lot of money into a venture that isn't on fairly solid ground -- but mortgages granted to people with poor credit are quite akin to high-tech firms that had never turned a profit. In both cases, investors gleefully looked past the risk.

Now investors are smarting from what happened to Bear Stearns. And traders are somewhat chastened, for now. Erin Callan, the chief financial officer for Lehman Brothers Holdings Inc., said her firm has certainly become more wary about the risks it takes amid the credit crisis. However, the market's gyrations also offer Lehman's army of traders an opportunity to make money.

"We just try to come in, and run the business the best way we can," she said. "But, you can't survive if you take no risks at all. All we can do is plan in this environment, making sure we do all the things to optimize running the firm."

It seems there's little that will change an industry and a lifestyle attached to Wall Street, which is thought of by Americans as more than just the center of free-market capitalism. Its culture attracts men and women with a swashbuckling mentality -- smart, aggressive risk takers with the potential to become very rich. And, their skills in trading and investment banking were proven this past week -- even after news of Bear Stearns' buyout.

Chief executives at Morgan Stanley, Goldman Sachs Group Inc., and Lehman Brothers pointed out that trading desks played a big part in offsetting massive mortgage-backed asset write-downs, which have ticked past $156 billion for global banks since last year.

As the three companies released first-quarter earnings data, Morgan Stanley said equity trading revenue surged 51 percent to $3.3 billion. Revenue at its fixed-income sales and trading group dropped 15 percent to $2.9 billion, but it was still the firm's second-highest performance ever despite having to write down $2.3 billion linked to subprime mortgages and leveraged loans.

And that pleased investors. Morgan Stanley had its largest gain in more than a decade on Wednesday, climbing 18.8 percent to $42.86. Rival investment banks also had their best week since 2001.

But, investors shouldn't get too comfortable -- the investment banking industry, and Wall Street in general, still have a long way to go before they can be called healthy. It's not just the credit market problems that are an issue, it's also the struggling U.S. economy and its potential to hurt other countries. "Until we feel more certain about the worldwide economies, we don't see things picking up dramatically," said Goldman Sachs CFO David Viniar. "We just need to keep plugging away."

IMF to Develop Sovereign Funds Code

IMF Board OKs Plan to Devise Sovereign Wealth Code.

The International Monetary Fund's executive board on Friday approved plans to develop a code of best practices for sovereign wealth funds in an effort to mitigate concerns about their investment strategies.

Jaime Caruana, director of the IMF's monetary and capital markets department, said the set of principles agreed to Thursday by the U.S., Abu Dhabi and Singapore was a welcome contribution to its own work. He noted that the three countries endorsed the multilateral effort under way by the IMF and Organization for Economic Cooperation and Development to develop a set of best practices for both sovereign wealth funds and the countries in which they invest.

"I think we are all moving basically in the same direction," Caruana said on a conference call. "We think a better understanding of the role and the practices of the sovereign wealth funds, and the development of this set of best practices, would be mutually beneficial to all the parties." The IMF plans to hold a round-table with the state-owned funds in April, with the aim of coming up with a draft of a code by August.

U.S. Treasury Secretary Henry Paulson on Thursday announced an agreement with officials from Abu Dhabi and Singapore, which operate sovereign wealth funds, on sets of principles for both the funds and their recipients.

The joint statement called for the funds to make a formal pledge to invest for commercial rather than "geopolitical" reasons, as well as for strong disclosure and governance standards. Recipient countries were urged to avoid protectionist measures or discriminate against the funds, according to the principles.

Recent investments in cash-hungry Wall Street firms totaling over $35 billion show that they can contribute to global financial stability, Caruana said, but added that best practices would help "mitigate" concerns about the funds and their investment strategies.

The funds, which have grown rapidly to as much as $3 trillion globally, have come under greater scrutiny as they have shifted more assets into equity holdings. The IMF projects that they could expand to $10 trillion in five years, while other estimates anticipate as much as double that amount.

Japan Economy Slows Sharply

Senior Central Banker in Japan Warns That Economy Is Slowing Sharply.

Japan's interim central bank chief vowed Friday not to let the absence of a governor hamper the country's economic and financial activities while another central bank official said the economy is slowing "sharply."

The Bank of Japan has no governor after the opposition controlled upper house of parliament rejected two government nominations in a row, saying they were too politically connected as former Ministry of Finance bureaucrats to uphold the central bank's independence. The five-year term of former Gov. Toshihiko Fukui ended Wednesday.

A new central bank deputy head, Masaaki Shirakawa, whose nomination was approved last week, was named acting governor this week. "We are in an unusual situation without a governor," Shirakawa said at a press conference Friday. "But we cannot let the bank's operations stall. I will fulfill my duties until a governor is appointed."

Kiyohiko Nishimura, the bank's other deputy governor, said Japan's economic slowdown is getting worse. "The economy is slowing quite sharply, even though it is on a mild expansionary trend," he told the same press conference. "We need to manage policy extremely carefully."

The political deadlock is being viewed as a major fumble in a nation preoccupied with appearances, especially on the international stage, amid global financial market turmoil that could require cooperation among central banks.

The political confrontation has brewed for weeks, although the world's second-largest economy faces risks of slipping into recession, as a plunging dollar batters exports and soaring oil prices erode corporate profits.

Meanwhile, Economy Minister Hiroko Ota expressed hopes a new governor would be named soon while brushing off worries about any possible impact on the economy. "In the current subprime credit crisis, it is important to be able to react to risks quickly," she told reporters.

Japanese media reports said the selection of a new governor could drag into April, as some ruling party politicians are hopeful time may calm the outrage in the opposition. Opposition lawmakers are angry the ruling coalition rammed through legislation that require approval from only the lower house of parliament. The nomination of Bank of Japan governor needs approval from both houses.

Last week, the opposition rejected the first candidate for central bank chief, former deputy central bank governor Toshiro Muto, and then voted down Koji Tanami earlier this week.

Billions from Fed's Emergency Lending Tapped

Investment Houses Borrow Billions From Fed's Emergency Lending Program.

Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported Thursday. The lending is part of a major effort by the Fed to help a financial system in danger of freezing. Those large firms averaged $13.4 billion in daily borrowing over the past week from the new lending facility. The report does not identify the borrowers.

The Fed, in a bold move Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, got under way Monday and will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

Goldman Sachs, Lehman Brothers and Morgan Stanley said Wednesday they had begun to test the new lending mechanism. On Wednesday alone, lending reached $28.8 billion, according to the Fed report.

The Fed created a way for financially strapped investment firms to have regular access to a source of short-term cash. This lending facility is seen as similar to the Fed's "discount window" for banks. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.

Investment houses can put up a range of collateral, including investment-grade mortgage backed securities. The Fed, in another rare move last Friday, agreed to let JP Morgan Chase secure emergency financing from the central bank to rescue the venerable Wall Street firm Bear Stearns from collapse. Two days later, the Fed back a deal for JP Morgan to take over Bear Stearns.

Thursday's report offered insight on how much credit was extended to Bear Stearns via JP Morgan through the transaction the Fed approved last Friday. Average daily borrowing came to $5.5 billion for the week ending Wednesday.

Separately, the Fed said it will make $75 billion of Treasury securities available to big investment firms next week. Investment houses can bid on a slice of the securities at a Fed auction next Thursday; a second is set for April 3.

The Fed will allow investment firms to borrow up to $200 billion in safe Treasury securities by using some of their more risky investments as collateral. By allowing this, the Fed is hoping to take pressure off financial companies and make them more inclined to lend to people and businesses.

The housing collapse and credit crunch have led to record-high home foreclosures and forced financial companies to rack up multibillion losses in complex mortgage investments that turned sour. In the past day and weeks, the Fed has taken extraordinary moves aimed at making sure that problems in credit and financial markets do not sink the economy.

Fed Faces Sour Economy with High Inflation

Divisions Within Fed Make Bernanke's Juggling Act Harder.

Ben Bernanke's juggling act has gotten harder. The Federal Reserve chairman has been taking extraordinary steps to prevent credit, financial and housing problems from driving the country into a deep recession. At the same time, he faces the danger that the very tonic to brace the sickly economy could bring about another dangerous ailment-- inflation. And, rare divisions have surfaced among Bernanke and his central bank colleagues about just how aggressive the Fed should be in lowering interest rates to treat the wobbly economy.

Two of the Fed's members -- Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas -- on Tuesday opposed cutting a key interest rate by a hefty three-quarters point. Instead, they favored a smaller reduction. It was a crack in the mostly unified front the Fed often shows the public. The last time there was a double dissent was in fall 2002 under chairman Alan Greenspan.

The reasons for the Plosser's and Fisher's dissenting votes weren't laid out in the statement explaining the Fed's action, although both men have a reputation for being especially vigilant about fighting inflation. "Containing inflation is the purpose of the ship I crew for, and if a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient," Fisher said in a speech earlier this month.

In fact, the Fed as a whole expressed concern on Tuesday about higher inflation -- something it didn't mention in the statement issued after its previous meeting, which concluded on Jan. 30. "Inflation has been elevated, and some indicators of inflation expectations have risen," the Fed said Tuesday. Although policymakers were hopeful that prices would moderate in the coming quarters, they acknowledged that "uncertainty about the inflation outlook has increased." Rising inflation, fueled in large measure by skyrocketing energy prices, complicates Bernanke's job of trying to get the economy back on firm footing.

The Fed started cutting rates last September and turned much more forceful this year. Those lower rates can aggravate inflation at a time when people and businesses already are smarting from high energy and food prices. The Fed's rate cuts also have weakened the dollar. That has raised the cost of imported goods coming into the U.S. and could lead American companies to raise their prices as foreign-made goods become more expensive. If treating inflation were the priority, the Fed would take the opposite action and raise rates.

Fears have grown that the country could be headed for "stagflation," a toxic mix of stagnant economic activity and rising inflation not seen in three decades. "I don't anticipate stagflation," Bernanke told Congress last month. "I don't think we're anywhere near the situation that prevailed in the 1970s."

Oil prices, which have galloped to record highs in recent weeks, have eased but still top $104 a barrel. Gasoline prices have marched upward and are expected to hit $4 a gallon nationwide this spring. "I think the threat of inflation is as high as it's been since the 1970s. Bernanke and the rest of them have a challenging task to navigate the economy away from recession and at the same time avoid inflation taking root," said Sean Snaith, economics professor at the University of Central Florida. "If Bernanke can do this, he'll look like a hero."

Snaith and other economists said that Tuesday's double dissents and the Fed's talk about inflation concerns could make it more difficult for Bernanke to build consensus around the Fed's next move on interest rates. "One more dissent would be an open revolt," said Ken Mayland, economist at ClearView Economics.

The Fed's next scheduled meeting on interest rates is April 29-30. Some believe the Fed might be more inclined to order a smaller rate cut at that time, depending on economic and financial conditions. "Bernanke will have a tougher juggling act to do in the future," Mayland said. "It is a fine line that they are walking here between two troubles."

In slashing interest rates, the Fed has been squarely focused on rescuing the economy. At the same time, Bernanke has repeatedly said the Fed must be on guard for any inflation danger signs.

Why? Because once inflation gets a grip on the economy, it can be hard to break. A rapid rise in price erodes the purchasing power of people. It squeezes companies' profits, too, and can make them more reluctant to hire and expand. It eats into returns on investments. As people and companies hunker down, that further restrains overall economic growth.

Former Fed Chairman Paul Volcker ratcheted rates up to the highest levels since the Civil War to break inflation's hold. That jolt, however, plunged the country into the painful 1981-82 recession.

"There is increasing concern among some on the (Fed) that freewheeling rate cuts are creating a significant problem with the Fed's goal of anchoring inflation expectations," said Scott Anderson, senior economist at Wells Fargo Economics. If people, companies and investors believe inflation will pick up, he said, they will act in ways that can make inflation worse.

"It is important that inflation expectations remain stable. If those expectations become unhinged, they could rapidly fuel inflation," Plosser said in February. "Moreover, as we learned from the experience of the 1970s, once the public loses confidence in the Fed's commitment to price stability, it is very costly to the economy for the Fed to regain that confidence."

US Treasurys Rally on Economic Worries

Treasurys Rally As Investors Reach for Safety As Global Concerns Rise Ahead of Holiday Weekend.

Treasurys staged a massive rally Wednesday, as fears about continuing fallout from the credit crisis prompted investors to seek safe assets ahead of a long holiday weekend.

There were positive developments in the U.S. mortgage industry Wednesday as well as the afterglow of a sizable Federal Reserve rate cut the day before. But those encouraging developments were overshadowed by worries that other banks could be in dire straits following the near-collapse of Bear Stearns Cos. Inc. and its stunning $2-a-share takeover by JP Morgan Chase & Co.

There remain troubling signs of weakness at some foreign and domestic banks and those problems helped spark the Treasurys rally. For instance, Switzerland's largest bank UBS AG Tuesday said its chairman, Marcel Ospel, took a 90 percent pay cut for 2007. The bank has been beset by massive writedowns linked to its exposure to the U.S. mortgage market.

The strong demand was compounded by the unwinding of a heavy prior day selloff and by the approach of the three-day market holiday for Easter. Investors often buy low-risk assets and unload risky assets ahead of a long weekend. The bond market will close one hour early on Thursday at 2 p.m. Eastern time Thursday ahead of the holiday.

The benchmark 10-year Treasury note rose 1 to 100 23/32 with a yield of 3.41 percent, down from 3.50 percent late Tuesday, according to BGCantor Market Data. Prices and yields move in opposite directions. The 30-year long bond rose 2 18/32 to 100 30/32 with a yield of 4.26 percent, down from 4.37 percent.

The 2-year note fell 1 to 100 23/32 with a yield of 1.63 percent, unchanged from late Tuesday. More buying in after hours trade sent yields even lower. At 5:30 p.m. Eastern time, the 10-year yield was 3.34 percent, the 30-year yield was 4.20 percent and the 2-year yield was 1.47 percent.

Wednesday's massive buying spree also produced exceptionally heavy demand for short-term bills that pushed some yields down to fractional levels. The 3-month bill yield plunged to 0.63 percent from 0.92 percent Tuesday as the discount rate weakened to 0.62 percent from 0.91 percent. The 1-month yield skidded to 0.24 percent from 0.47 percent as the 6-month yield fell to 1.22 percent from 1.32 percent.

Despite the vigorous fear-driven rally in the Treasury market, there was plenty of goods news for the domestic bond market Wednesday. The government loosened capital requirements for the mortgage-finance companies Fannie Mae and Freddie Mac by cutting their surplus capital requirement to 20 percent from 30 percent.

The move should provide up to $200 billion in new funding to the mortgage securities market. The action followed an unusually large 0.75 percentage point reduction in the Federal funds rate to 2.25 percent Tuesday that was accompanied by a statement that hinted at more rate cuts ahead from the Federal Reserve.

Investors cheered the Fed's bold moves, but were uncertain what the ultimate outcome will be for the fixed-income market. "Bernanke and policy makers are allowing an implosion of the biggest credit bubble in history," said T.J. Marta, a fixed-income analyst at RBC Capital Markets. "You have to run the gauntlet between letting that bubble collapse, but not letting it take out the banking system and the economy -- good luck with that one."

Bond investors also are concerned that the huge rate cuts the Fed has implemented since last summer could accelerate inflation; rising inflation erodes the value of fixed-income investments.

Fed Cuts Rate to 2.25% Creating Psychological Risks

Fed's Bold Moves Could Have Psychological Risks.

The key Fed rate has fallen below the intended support at 2.5%. US recession or depression is not avoidable now? There's a possibility now that Fed might continue cutting rate until below 1%.

There's a risk in Federal Reserve Chairman Ben Bernanke's bold moves of late. If recent history is any guide, the euphoria that met the Fed's three-quarter-point reduction to a key interest rate Tuesday could be short-lived. With a string of urgent and aggressive actions, the Fed itself could end up feeding the panicky mind-set that it so desperately wants to calm.

Even inside the Fed there was disagreement about just how much the key interest rate -- its most potent tool in dealing with economic trouble -- should be lowered. Two Fed members dissented, preferring a smaller cut, while Bernanke and seven others prevailed with a more powerful three-quarter-point one. Cuts of this size are pretty infrequent. Bernanke, in an emergency session in January, ordered one -- making for the single-biggest reduction in more than two decades.

Wall Street was ebullient Tuesday -- soaring 420 points -- even as it had hoped for greater relief -- a rare reduction of one percentage point. Yet, one wonders just how long the good feeling will last. Wall Street has been largely engulfed in turmoil since last year -- swinging wildly at times between relief and panic.

In a bid to revive a sagging economy, the Fed dropped its key rate to 2.25 percent. In turn, the prime lendng rate for millions of consumers and businesses fell by a corresponding amount, to 5.25 percent. Both are the lowest since late 2004. It held the door open to the possibility that rates would fall even lower in the months ahead.

The Fed's action was the latest in a series of extraordinary moves -- many in just the past few days and weeks -- that the Fed has resorted to as it seeks to prevent a financial catastrophe that could plunge the country into a deep and painful recession. Yet, it raises the question: can the Fed in its very efforts to contain spreading credit and financial crises, end up also spreading fear?

"I think it is true that Federal Reserve actions coming closely one after the other in the last few weeks -- while no doubt are helpful for the economy -- they carry with them a risk that people will perceive them as involving some slight desperation," said Marvin Goodfriend, economics professor at the Carnegie Mellon University.

The Fed's words -- not just its actions -- matter a lot and can color how people view the economy and their own financial fortunes. On Tuesday, the Fed was blunt in its assessment that the country's economic health has worsened. "The outlook for economic activity has weakened further," the Fed said. "Financial markets remain under considerable stress and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."

Such words can make people more nervous. The Fed walks a fine line between trying to give the public an accurate picture of what is going on and at the same time not spooking them -- or investors. "Saying nothing could also trigger a panic as well" and undermine the Fed's credibility, said Victor Li, an economics professor at the Villanova School of Business. "People would be more nervous if the Fed sat back and did nothing."

Still, the Fed's rate-cutting campaign, which started in September, and turned much more forceful in January, hasn't put people into a better frame of mind where they are more willing to spend. Instead, they have hunkered down, adding to the economy's problems. "Maybe the public is saying, the Fed can't really do much about the impending recession," Li said.

The Fed's lifelines -- through interest rate cuts and other moves -- probably won't pull the country back from the brink of its first recession since 2001. Many believe the country has slipped into recession.

With jobs harder to come by, most people probably will feel skittish for a while. Employers slashed 63,000 jobs in February, the most in five years. It was the second month in a row of nationwide job losses. The unemployment rate, now at 4.8 percent, is expected to rise to around 5.5 percent later this year.

And, many believe the market's volatility will persist for some time, too. "Volatility is to be expected. You'll have good new one day, bad news another day. The market is trying to find a stable point in being buffeted by good and bad revelations of matters involving credit," Goodfriend said.

Just a week ago, Wall Street soared by nearly 417 points -- the biggest rally since 2002 -- when the Fed unveiled a new and innovative way to deal with the worsening credit crunch, -- letting big Wall Street firms borrow up to $200 billion in ultra-safe and much-in-demand Treasury securities and pledge harder-to-sell mortgage securities as collateral. The euphoria, however, was short-lived, and investors fell back into a nervous funk.

A few days later, the Fed, in a rare use of authority dating back to the Depression-era days of the 1930s, backed a rescue package of venerable investment bank Bear Stearns, which teetered on the brink of collapse. Wall Street, however, tumbled by nearly 195 points as the Fed's action stoked concerns about the severity of credit troubles and whether other big financial firms might falter.

Two days after that -- on Sunday -- the Fed took more bold actions -- including backing JP Morgan's takeover of Bear Stearns and guaranteeing up to $30 billion in troubled mortgages and other assets that brought about Bear Stearns' downfall. Critics contend it's akin to a government bailout.

The Fed also Sunday agreed to let big investment houses get emergency loans directly from the central bank for the first time. The new lending facility -- similar to one that's been available to commercial banks for years -- started Monday and will continue for at least six months. The following morning, stocks around the world fell sharply. Investors remained skittish in the United States, although the Dow Jones managed to finish the day up slightly.

The panicky mind-set that has swept over investors since last summer has made credit become harder and harder to get. Financial institutions, which racked up huge losses due to soured investments in mortgage-linked securities, became increasingly wary of lending and hoarded cash.

"The menacing beast is not a recession but the credit crisis," said Greg McBride, senior financial analyst at Bankrate.com. "Recessions happen and we'll get through them particularly with the Fed's rate cuts and the government's stimulus (of tax rebates and tax breaks). But without properly functioning credit markets, the economy can't grow. It is like starving a fire of oxygen."

Bush Plans More Economic Stimulus Action

Bush Says if More Action Is Needed to Stimulate Economy, 'We'll Take It'.

President Bush, eager to reassure a rattled country, said Tuesday that his administration is ready to intervene again to stabilize the economy. "If there needs to be further action, we'll take it, in a way that does not damage the long-term financial health of our economy," Bush said along the docks of this port city.

It was the second signal in two days from Bush about the possibility of more government action to help hurting consumers and a shaken financial market. Much of his agenda these days is meant to show he is engaged in fixing the economy but still confident in it.

Bush was not specific about other steps he might take. For now, he has championed the upcoming tax rebates for millions of people and tax breaks for businesses. And he has embraced action by the Federal Reserve, which keeps slashing interest rates and has helped finance the buyout of a collapsing financial giant.

The president has rejected other ideas from the Democratic Congress. Those include extending unemployment and food stamp benefits, and sparing homeowners from foreclosure by allowing bankruptcy judges to adjust loan rates.

Juxtaposed against the economic concern, Bush had a good day for the Republican Party. In wealthy neighborhoods in Jacksonville and Palm Beach, Bush raised more than $1.4 million for the Republican National Committee. Both fundraisers were closed to the media.

In between, during a speech largely focused on trade, Bush said the American people should have confidence in the economy. He chose his examples carefully -- low unemployment, rising productivity, a strong agricultural sector, fresh advances in technology. "I understand there's short-term difficulty," Bush said. "But I want people to understand that in the long term, we're going to be just fine."

In the meantime, the economy has taken a punch in the gut. A collapse of the subprime housing market led to a credit crisis that has shaken the financial system to its core. Consumer confidence has tanked, gas prices are high, foreclosures are up, home values are down. The same economy that produced jobs for most of Bush's presidency is now shedding them.

Bush linked the economic story to his theme of the day, opening markets through trade. First he walked the docks of a cargo company that oversees shipping to and from Colombia and other nations. After watching a giant forklift snatch and move a cargo trailer, Bush climbed the rig and got behind the wheel.

He resisted the temptation to steer it. Bush then touted a trade deal with Colombia that faces a fight in the Democratic-run Congress. The deal would remove most tariffs on American exports and cement Colombia's preferential trade status with the United States.

Bush cast the deal in terms much broader than a trade pact between two countries. He says it is a way to promote progress in a place fighting against terrorists, drugs and corruption. At stake, he said, is nothing less than the standing of the United States. "This is a vote that is being observed carefully by people across the world," he said.

There was a potential opening for compromise with Democratic leaders. Bush said he wants to work with them on providing aid to workers who lose jobs because of overseas competition. Democrats want more of that aid before approving the Colombia trade deal.

Still, Bush criticized some Democrats for opposing the deal on grounds that Colombia's government must still do more to halt violence and promote democracy. "This is unrealistic. And it is unfair," Bush said. Bush spoke as the Fed slashed a key interest rate by three-fourths of a percentage point, the latest in a series of aggressive moves to contain the credit crunch.

Bush has embraced those steps by the Fed, including helping JPMorgan Chase and Co. take over Bear Stearns, a collapsing investment giant. The Fed agreed to guarantee and assume all risk on $30 billion of the bank's riskiest mortgage-based assets. "It was action that was necessary," Bush said Tuesday of the Fed's actions.

Fed Expected to Cut Rates Aggressively

Fed Poised to Cut Rates Aggressively As It Combats Weak Economy and Severe Credit Crisis.

The Federal Reserve is expected to aggressively lower interest rates in its intensified battle against the credit crisis and spreading economic weakness. The question is whether all of the effort will turn the tide.

Federal Reserve Chairman Ben Bernanke and his colleagues have already been working overtime, employing a variety of novel approaches to keep the economy out of a recession or at least moderate the impact of any downturn.

Treasury Secretary Henry Paulson made the rounds of the morning TV shows Tuesday to underscore the administration's commitment to keeping turmoil in the financial markets from worsening a struggling economy.

"The priority we have is a stable, orderly financial markets," he said on CBS' "The Early Show. "This is very important to the health of our economy and it's very important to the American people because access to credit is key to businesses that need to invest to create jobs, it's key to families that need to borrow to finance a home or for college education." He said the focus of policymakers "is reducing the spillover into the real economy from the turbulence and disruptions in our financial markets."

To those who would complain that the administration is more interested in bailing out Wall Street than struggling homeowners, Paulson said the thousands of Bear Stearns employees likely to lose their jobs and life savings, and thousands of shareholders who have lost billions because of the company's collapse, probably do not feel like they have been bailed out.

More relief is expected Tuesday when the central bank is expected to cut a key interest rate by one-half to a full percentage point. "There is no reason for the Fed not to be aggressive," said Mark Zandi, chief economist at Moody's Economy.com. "The economy is in a recession, the financial system is in disarray and inflation is low."

The Fed's target for the federal funds rate, the interest that banks charge each other on overnight loans, currently stands at 3 percent, down from 4.25 percent at the beginning of this year. That was before global market turmoil in January prompted an emergency three-quarter-point cut on Jan. 22 and a half-point move eight days later, the biggest reductions in a single month in more than a quarter-century.

Many economists believe the Fed will deliver another three-quarter-point cut or perhaps even a full one-point reduction at Tuesday's meetings because Fed officials will not want to disappoint fragile financial markets, which have been on a rollercoaster ride in recent days as they have watched Bear Stearns Cos., the nation's fifth largest investment house, suddenly be brought down by the equivalent of a run on the bank.

JPMorgan Chase & Co. stepped in to announce it was purchasing Bear Stearns at a fire-sale price on Sunday in a deal helped along with a pledge that the Fed would supply a $30 billion line of credit to back up Bear Stearns' assets.

That offer over the weekend was the latest move by a central bank that has been pulling out all of the stops, including using Depression-era procedures, to pump cash into the financial system. Analysts, who faulted Bernanke for being slow to recognize the gravity of the situation last year, now give him high praise for bringing all the Fed's powers to bear.

"The Fed is doing what it can to come to rescue an economy that faces potentially a huge meltdown in financial markets," said Lyle Gramley, a former Fed governor and now an analyst with Stanford Financial Group. "The Fed is acting as a lender of last resort and being very aggressive and innovative."

In addition to providing support for the Bear Stearns sale, the Fed also announced Sunday one of the broadest expansions of its lending authority since the 1930s, saying it would allow securities dealers for at least the next six months to borrow directly from the Fed. That privilege, until now, had been confined to commercial banks.

At the same time, the Fed announced it was cutting the interest rate on those direct loans from the Fed, through a facility known as the Fed's discount window, by a quarter-point to 3.25 percent.

In other moves, the Fed last week announced that it would lend up to $200 billion of Treasury securities that it owns to investment banks starting March 27 for a period of up to 28 days in return for a like amount of the investment banks' shunned mortgage-backed securities. The Fed also announced recently that it was boosting the size of special loans it has been making since December to commercial banks.

The scale of these actions underscored the threat facing the economy from a severe credit squeeze that began with a wave of defaults on subprime mortgages last year but has now spread to other parts of the credit markets, triggering multibillion-dollar losses by some of the country's largest financial institutions.

Analysts said it will take some time to determine whether the Fed has done enough to stem the wave of panic among investors. The rapid decline of Bear Stearns stock -- which had a market value of about $20 billion in January, only to collapse to a sales price of $2 per share, or about $236 million, this past weekend -- has given investors the chills.

"The Fed is trying very hard to figure out how to calm the markets down, but so far it hasn't been very successful," said David Wyss, chief economist at Standard & Poor's in New York. "Markets are worried that there might be another Bear Stearns out there."

Premier Wen Warns China's Inflation Pressure

Premier Says China Faces Inflation Pressure and Risk of Drastic Economic Fluctuation.

China's premier warned Tuesday already high inflation may accelerate as the country prepares to host the Beijing Olympics. But he promised an anxious public that price increases can be held to the official 4.8 percent target this year.

Premier Wen Jiabao said China's economy should grow strongly this year, though he acknowledged he is "deeply worried" about the global impact of the U.S. subprime crisis. Beijing's top priority is cooling inflation that is battering ordinary Chinese, Wen said at a nationally televised news conference at the end of China's annual legislative session.

"We are under mounting inflationary pressure. We also face the potential risk of drastic economic fluctuations," Wen said. He announced no new initiatives, but said, "if we take the right measures, we are confident we can control inflation."

Inflation soared to 8.7 percent in February, its highest level in nearly 12 years, driven by a 23.3 percent jump in food costs despite the imposition of price controls. That has fueled concern about unrest in a society where the poor spend up to half their incomes on food. Bouts of high inflation in the 1980s and '90s sparked protests, a scenario that communist leaders are eager to avoid, especially as China comes under foreign scrutiny ahead of the Summer Games.

Sharp price rises began in mid-2007, triggered by shortages of pork, grain and some other food items. Nonfood inflation is low, with prices in February rising by 1.6 percent over the same month last year. But costs of wholesale goods and raw materials are rising, adding to pressure for higher consumer prices.

Beijing has raised interest rates repeatedly to cool pressure for price rises amid a boom that is expected to see the economy grow by at least 9 percent this year after an 11.4 percent expansion in 2007. China has the right conditions to control inflation, with a "general oversupply" of industrial goods and an ample 150-200 million tons of government grain reserves, Wen said.

The government has been releasing grain at below-market prices to ease shortages. Economists say Wen's 4.8 percent inflation target looks unrealistic as wholesale prices rise, increasing pressure for companies to pass on higher costs to consumers. Outside forecasts of full-year inflation are as high as 7.2 percent.

Still, Wen said, "we have no plans to change this predictive goal." "We believe that by setting this goal we have shown the resolve of the government to control price rises," he said. "We also want to stabilize people's expectations for price rises."

Wen warned that China was bound to be affected by the subprime crisis, which has sent financial markets reeling. "I have watched these developments in the world economy very closely and I am deeply worried," he said. But he said China's own economic fundamentals are sound. "China still has vast market potential, especially in rural areas," he said. "That is why we are confident of China's economic prospects."

The premier promised more market-style reforms to help control inflation. "We need to strengthen and improve our efforts in macroeconomic regulation and we need to give full play to market forces in allocating resources," he said. That will include reforms of China's government-owned banking industry, he said, without giving details.

One of China's newly appointed vice premiers, Wang Qishan, a former president of a major government bank, is expected to be put in charge of re-energizing finance and banking reforms that have stalled in recent years. Wang appeared at the news conference with Wen but did not speak.

Fed Cuts Discount Rate to 3.25%

Fed Takes Steps to Ease Crisis, Cuts Lending Rate to Financial Institutions to 3.25 Percent.

Worry about the damage a growing credit crisis is inflicting on an ailing U.S. economy led the Federal Reserve to make a rare weekend move, lowering a key lending rate before Wall Street opened Monday.

The central bank approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created a lending facility for big investment banks to secure short-term loans. The new lending facility will be available to Wall Street firms on Monday.

"These steps will provide financial institutions with greater assurance of access to funds," Federal Reserve Chairman Ben Bernanke told reporters in a brief conference call Sunday evening.

The Fed acted just after JPMorgan Chase & Co. agreed to buy rival Bear Stearns Cos. for $236.2 million in a deal that represents a stunning collapse for one of the world's largest and most venerable investment banks. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JPMorgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.

"It seems as if Bernanke & Co. are pulling out all the stops to avoid a serious financial market meltdown," Richard Yamarone, an economist at Argus Research, said Sunday evening. However on world financial markets, Asian stocks plunged Monday after the JPMorgan and Fed announcements. Markets in Australia and New Zealand were also off and European stocks fell in early trading.

Oil prices hit a record in Asian trading as the value of the dollar continued its free fall and U.S. stock index futures were down sharply, suggesting Wall Street would open lower after sinking Friday. "There is persistent credit uncertainty. Market players have been repeatedly let down which shows the subprime mortgage problems are so deep-rooted," said Atsuji Ohara, global strategist of Shinko Securities in Tokyo.

President Bush has scheduled a White House meeting Monday afternoon with his Working Group on Financial Markets, which includes Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox. Paulson said Sunday, "I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets."

The new lending facility -- described as a cousin to the Fed's emergency lending "discount window" for banks -- is geared to give major investment houses a source of short-term cash on a regular basis -- if they need it.

It will be in place for at least six months and "may be extended as conditions warrant," the Fed said. The interest rate will be 3.25 percent and a range of collateral -- including investment-grade mortgage backed securities -- will be accepted to back the overnight loans. The "discount" rate cut announced Sunday applies only to the short-term loans that financial institutions get directly from the Federal Reserve. It doesn't apply to individual borrowers.

The Fed's actions are the latest in a recent string of innovative steps to deal with a worsening credit crisis that has unhinged Wall Street. The action comes just two days before the central bank's scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered. That key rate is now at 3 percent and is expected to be cut by at least one-half percentage point on Tuesday. Analysts said the Fed's new steps may lessen pressure for a super-sized cut to that rate.

The Fed said in a statement that the steps are "designed to bolster market liquidity and promote orderly market functioning ... essential for the promotion of economic growth." Even with the Fed's aggressive moves, economic and financial conditions keep deteriorating. An increasing number of economists believe the country already has slipped into its first recession since 2001. Many economists think that the economy is shrinking now in the January-to-March quarter. The first government figures on first-quarter economic activity will be released in late April.

The Fed on Sunday also approved the financing arrangement through which JPMorgan will acquire Bear Stearns. JPMorgan said the Fed will provide special financing for the deal. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets, according to JPMorgan.

Weekend's Special: Coast Redwood, the World's Tallest Living

The coast redwood (Sequoia sempervirens) is one of the three sequoia species, together with the giant sequoia (Sequoiadendron giganteum) and the dawn redwood (Metasequoia glyptostroboides). The coast redwood grows in natural stands in a long, thin coastal area along the Pacific Ocean in the west and northwest of the US (mostly California). It is the tallest tree in the world.

With its relatively slender silhouette this tree can grow even 20 meters higher than the tallest giant sequoias, that are nevertheless the biggest trees in the world, when looking at the volume of the trunk. The tallest known living tree, named Hyperion, is 115.55 m or 379.1 feet (measured in 2006) tall! This gets close to 120 to 130 m, that, according to a 2004 biological study, is the maximum attainable height of a tree.

Foggy Coastal Forests of the Pacific

During the whole year it rains quite a lot in this thin coastal strip and it is quite foggy most of the time. This way the tree can absorb enough water and does not suffer that much from evaporation stress. Most of the tallest trees can be found in the wet river valleys on fertile, alluvial deposits, although unexpectedly a couple of recently discovered record breaking trees appeared to grow on the valley slopes. The coast redwood forests have an abundant undergrowth (amongst which there are a lot of ferns). However, the biggest biodiversity can be found tens of meters up: differents species of plants, lichens, salamanders, ... live high up in the sky between the complex branch systems of the redwoods. Prof. Steve Sillett, who studies these redwood canopies, compares them with "hanging gardens".

Description

On first sight, the needles of the coast redwood do not resemble those of the giant sequoia: they are bigger and flat, much like that of a yew. The crown is conical just like the one of the giant redwood, with an almost equally massive trunk with a reddish brown, soft bark. The egg shaped cones are smaller (2 to 3 cm). In contrast to most other conifers, the coast redwood starts to grow again after being cut. The maximum age is probably around 2500 years.

Because of the dramatic atmosphere, these forests have been used as scenery in movies: the scenes with the Ewoks in the Star Wars movies were shot in these woods, just as multiple parts of the Jurassic Park movies. For those last movies this choice is not very unlogic: during the Cretaceous, the top period for North American dinosaurs, these woods could be found all over the continent.

These trees (and especially young ones) are quite sensitive for winter frost and do not grow that well on the eastern side of the Rockies and in most parts of Europe. Biggest limiting factor is drought: it just isn't wet enough. In the wettest European parts, in England and Wales, planted redwoods do already reach 45 meters and more en seed themselves.

Tallest Tree in the World

The tallest tree in the world is a coast redwood (Sequoia sempervirens), named Hyperion after a person in Greek mythology. He is no less than 115.55 m (379.1 feet) tall! This enormous tree was discovered only in August 2006 in a remote part of the Redwood National Park, California by naturalists Chris Atkins and Michael Taylor. Their first preliminary measurements were done with professional laser measurement equipment based on goniometry.
In September 2006 the tree was remeasured by Steve Sillett. This was done in the most accurate way: he climbed to the top of the tree to drop a tape from there straight to the ground. This tape drop was filmed for National Geographic.

In July 2006 some other record tall trees were discovered: "Helios" (named after the Greek God of the sun), the world's tallest known tree as of June 2006 (114.09 m), "Icarus" (113.14 m), and "Daedalus" (110.76 m).

The discoveries of 2006 are remarkable: these trees appeared to grow on slopes and not in the center of the valleys where water is most abundant, and where all the previous contenders to the title "tallest living tree in the world" grow. This means that it's not unlikely that there are even taller, not as such discovered trees out there, simply because people weren't looking for them there. Now the forested slopes are being sought trough by tall tree hunters Chris Atkins and Michael Taylor. It's on a location like that that in August 2006 the current tallest (known as such) tree of 115.55 m was found.

In 2007 Chris Atkins and Michael Taylor had already scanned most of these new, unexpected locations. They think it's very unlikely a taller tree than Hyperion will be found, but you never know.

Hyperion has been quite lucky: only a few hundred feet from the base is the edge of a clearcut from the seventies. Clearcutting is a forestry practice in which all trees in an area are logged and the entire area is devastated. About two weeks before also Hyperion would have been attacked by the chain saws, this valley was added to the Redwood National Park during the Carter administration. Logging companies feared this would happen and worked 24/7 in the broad redwood valleys and kept logging old growth forests that were there long before men were ever entered these valleys.

In the seventies only an alarming 15% of the rich redwood forests remained, nowadays only 4% still exists and even today, as you read this, old growth Californian forests are being logged.

According to redwood standards, Hyperion is quite young and still growing vigorously. Sillett thinks the tree might be "only" 600 years old, which is about 20 years in human time.

Until July 2006 the tallest known Sequoia sempervirens was "The Stratosphere Giant". He is 112.83 m tall (measured in 2004, Steve Sillett) en was only discovered in August 2000 (by Chris Atkins) in Humboldt Redwoods State Park, California, where a lot of these giants grow. It is very difficult to appreciate the majestic height of these trees from a photo. The image on the left gives a little bit a sense of scale: on the right you can see a person hanging on a climbing rope.

Just as is the case with other giants, like the "The Federation Giant" (112 m), the exact location is kept secret by the park rangers to avoid a tourist stampede to the tree. This could unbalance the fragile ecosystem of the forest and could harm the tree directly: in the past things already went wrong for tall trees that became too popular.

In case you don't have a clue about how tall 115.55 m (379.1 feet) is: the height of Big Ben in London is 96.3 m (316 feet), that of the statue of Liberty is 46.5 + 46.9 m (151 + 154 feet), so both tall constructions are largely lower than these trees.

Note that although the tallest living tree in the world is a coast redwood, the biggest living tree on the planet is a specimen of a related species, the giant sequoia.

Tallest Redwood Ever?

It is absolutely uncertain if the tallest as such known Sequoia sempervirens is really the tallest Sequoia or the tallest Sequoia that grew in historical times. Indeed, it is very possible that in the logged parts of the original redwood forests (96%) there were taller specimens, who fell victim to the ever hungry chain saws.

Other species that can grow very tall are other conifers who also grow naturally on the northwestern coast of North America. Comes in second place: the Douglas-fir (Pseudotsuga menziesii) with 100.3 m (329 feet), followed by the Sitka spruce (Picea sitchensis), of which the tallest known specimen is 96,7 m (317,3 feet) tall. Just as the wood of coast redwoods, the wood of these trees is of excellent quality, so the once vast forests of these trees are almost completely gone. Without any doubt there were taller specimens in there. For example, in 1900 a Douglas-fir of 125.5 m (411.7 feet) was logged.

Tallest Tree Ever Measured

The tallest tree ever measured was no Sequoia sempervirens, but a type of eucalypt (Eucalyptus), an Australian deciduous tree (images).
In 1872 forester William Ferguson spotted an extremely tall mountain ash (Eucalyptus regnans) near the Watts River, Victoria, Australia. Purportedly he was 132.6 m (435 feet) tall. In that time, multiple specimens of 140 m tall were reported in Tasmania.

We cannot check these measurements anymore: all these trees have been logged... Mountain ash was and is an important construction material in Australia.

Some reserve about these old measurements should be kept. The tallest mountain ash of which the heigth was measured with some certainty was 114.3 m tall and was also logged (1884).

Even nowadays the deforestation in mainland Australia and Tasmania is continuing. The relationship between environmental organizations and the state company Tasmania Forestry are tense, especially since they burned the biggest Australian tree "El Grande", although it was an accident according to Tasmania Forestry.

The tallest living eucalypts can be found in Tasmania. The tallest one, named "Icarus Dream", is now 97 m (318.2 feet) tall and is the tallest deciduous tree on earth.

Weekend's Featured: More Fed Rate Cuts Expected

Fed Expected to Cut Interest Rates Tuesday, but by How Much?

Desperate to aid an economy in crisis, the Federal Reserve is ready to deliver yet another big interest rate cut. How big? One-half of a percentage point, some economists say. Investors and others hope for even more, a three-quarters cut or perhaps a full point, given the turmoil on Wall Street. It will be a close call, Fed watchers say.

The speculation ends Tuesday afternoon after Fed Chairman Ben Bernanke and central bank policymakers have met. Whatever the decision, for a growing number of analysts, one more rate reduction will not be the lifeline that pulls the country back from the brink of the first recession since 2001.

Experts in this camp believe the economy is shrinking now because of the fallout from the housing and credit debacles. Businesses are shedding jobs, Wall Street is convulsing, energy prices are skyrocketing and people are reluctant to spend. Yet these economists say lower interest rates should help cushion the blows of a recession. "Many consumers, businesses and investors are simply running scared right now," economic consultant Carl Tannenbaum said.

The rate-cutting began in September with the goal of shoring up the economy and reviving spending. The Fed's key rate has fallen from 5.25 percent to 3 percent. The pace picked up measurably in January when, during an eight-day period, the Fed slashed the rate by 1.25 percentage points. It was the biggest one-month reduction in a quarter-century.

In response, commercial banks have lowered prime lending rates by corresponding amounts. The prime rate, now at a nearly three-year low of 6 percent, applies to certain credit cards, home equity lines of credit and other loans. A cut ordered by the Fed on Tuesday would further drop the prime rate.

Even with the Fed's aggressive moves, economic and financial conditions keep deteriorating. The Fed in recent days has taken extraordinary steps to help banks and Wall Street investment firms survive the stresses of the credit crisis. Financial institutions have racked up multibillion-dollar losses when mortgage-backed investments soured with the collapse of the housing market.

On Friday, the Fed used a Depression-era procedure to aid troubled Bear Stearns Cos. The investment bank, which faced a possible collapse, received a rescue package from the Fed and JPMorgan Chase & Co. Bear Stearns, which had made a fortune in mortgage-backed securities, has taken $2.75 billion in write-downs since last year.

Consultations about the situation continued through the weekend among representatives from the Fed, Treasury Department, financial institutions and others. President Bush planned to meet on Monday with his advisory panel on financial markets, whose members include Bernanke and Treasury Secretary Henry Paulson. The panel on Thursday recommended stricter regulation of mortgage lenders as part of a broad effort to prevent a repeat of a credit crisis threatening to drive the country into recession.

The Fed this past week also said it would pour as much as $200 billion into big Wall Street banks and investment houses and allow them to put up risky home-loan packages as collateral. This maneuver was intended to bring sorely needed relief in the market for mortgage securities. The Fed also has offered as much as $200 billion in short-term loans to banks and large financial institutions.

Some economists believe these actions minimize the need for an interest rate cut of 0.75 percent, or more, on Tuesday. "I saw it as a bit of a substitute for the super-sized rate cut that the financial markets are expecting," said Stuart Hoffman, chief economist at PNC Financial Services Group. Hoffman is predicting a half-point cut.

Battling an ailing economy is the Fed's No. 1 focus now. Yet galloping prices for oil and gasoline can complicate the job. High energy prices are a double-edged sword. They threaten to restrain economic growth because people have less money to spend elsewhere and they can aggravate inflation by forcing companies to boost prices. Crude oil prices top $110 a barrel. Gasoline surged to a record national average of $3.28 a gallon. At a few stations in California and Hawaii, the pump price has hit $4 a gallon.

At a congressional appearance in late February, Bernanke was asked how the economy's woes stack up against what the country faced in 2001. "I think there are some similarities," he said. "But, I guess as a Russian novelist once said, unhappy families are all unhappy in their own way, and every period of financial and economic stress has unique characteristics."

The Fed's rate cuts have added to the downward pressure on the value of the dollar, which recently plunged to a record low against the euro and has fallen sharply against the Japanese yen. The drooping dollar is stoking fears that inflation might take off. The weaker dollar could raise the cost of imported goods entering the U.S. and lead American companies to raise prices as foreign-made products become more expensive.

To Hoffman, that is a case for going with the half-point rate reduction. Other analysts believe the situation is so dire that the Fed must cut deeper. Brian Bethune and Nigel Gault, economists at Global Insight, are among those predicting a three-quarter point reduction. Given the turmoil on Wall Street, there even is a chance of a 1 percentage point cut, they said.

Dangerous cracks, meanwhile, are deepening in the job market. Employers did away with 63,000 jobs in February, the most in five years. It was the second month in a row in which nervous employers got rid of jobs. With the economy faltering, economists predicted the unemployment rate -- now at 4.8 percent -- would climb to 5.5 percent by year's end.

Even after Tuesday's expected rate cut, economists predict the Fed's key rate will head even lower, probably to 2 percent or even lower by the spring or early summer. The rate reductions and the government's economic aid plan of tax rebates and breaks should help economic growth in the second half of this year, analysts said. "It we can make it through the first part of this year and then recover, that would be a remarkable achievement," Tannenbaum said.

Weekend's Featured: Bush Says to Guard Against Overcorrecting Economy

Bush: Federal Government Must Guard Against Overcorrecting Economy With Sweeping Changes.

President Bush on Saturday said the government must guard against going too far in trying to fix the troubled economy, cautioning that "one of the worst things you can do is overcorrect." Democrats said Bush was relying on inaction to solve the problem.

Bush, in his weekly radio address, said the recently passed program of tax rebates for families and businesses should begin to lift the economy in the second quarter of the year and have an even stronger impact in the third quarter. But he urged caution about doing more, particularly about the crisis in the housing market where prices are tumbling and home foreclosures have soared to an all-time high.

"If we were to pursue some of the sweeping government solutions that we hear about in Washington, we would make a complicated problem even worse -- and end up hurting far more homeowners than we help," the president said.

The economy has surpassed the Iraq war as the No. 1 concern among voters in this presidential election year amid big job losses, soaring fuel costs, a credit crisis and turmoil on Wall Street. "In the long run, we can be confident that our economy will continue to grow, but in the short run, it is clear that growth has slowed," Bush said. He was spending the weekend at the Camp David presidential retreat in Maryland's Catoctin Mountains after delivering a speech in New York about the economy and helping raise $1.4 million for the national Republican Party.

Democrats said they would try to strengthen the economy with measures dealing with housing, energy efficiency and renewable energy. "The president continues to convince himself that inaction is the cure-all for the economic problems hurting hardworking Americans," Senate Majority Leader Harry Reid said in a written statement. "But Democrats know that wait-and-see is not a responsible strategy for an economy that is teetering on the brink of recession."

"Wages and home values are down," Reid said, "but prices for everything from health care to tuition to energy are up. Just this week, oil and gas prices reached record highs while the value of the dollar reached historic lows. I hope the president, who has been slow to acknowledge this problem, joins us in recognizing how urgently we need a solution."

Bush said he opposed several measures pending on Capitol Hill to deal with the housing crisis. They included proposals to allocate $400 billion to purchase foreclosed-upon and now-abandoned homes, to change the bankruptcy code to allow judges to adjust mortgage rates and to artificially prop up home prices.

"Many young couples trying to buy their first home have been priced out of the market because of inflated prices," the president said. "The market now is in the process of correcting itself, and delaying that correction would only prolong the problem."

Bush said his administration has offered steps offering flexibility for refinancing to homeowners with good credit histories yet are having trouble paying their mortgage. He cited other measures which he said would streamline the process for refinancing and modify many mortgages.

He said there were steps Congress could take, as well. "As we take decisive action, we will keep this in mind: When you are steering a car in a rough patch, one of the worst things you can do is overcorrect," the president said. "That often results in losing control and can end up with the car in a ditch," Bush said. "Steering through a rough patch requires a steady hand on the wheel and your eyes up on the horizon. And that's exactly what we're going to do."

Wall Street Already Bottoming, True?

The Stock Market Will Remain Volatile, but Some Analysts See Signs That the Bottom May Be Near.

Investors nursing whiplash symptoms after watching the market's recent wild swings may find that Wall Street will deliver some relief in the coming weeks. While volatility isn't going to disappear overnight, some experts suggest the market may be near the beginning of a recovery.

"I think we've seen a bottom," said Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc., a division of Wachovia. "It's probably not 'the' bottom," he said, "I think it would be presumptuous to call it 'the' bottom."

Some might consider any positive view contrarian, especially given the shock caused Friday by news of a bailout needed by investment bank Bear Stearns Cos., but Goldman said he thinks long-term investors have reason to start expecting some relief ahead.

"I think what we have is a Bear Stearns crisis, not a stock market crisis," he said of the Wall Street bank's liquidity problems, which stemmed from investors, customers and lenders withdrawing their business and pulling back on credit lines. "Right now, I'm not aware of any other major brokerage firms or banks that have this type of solvency problem." Still, Goldman said, such news can generate further negative feelings. "The level of pessimism, the calls I'm getting, are it's like the end of the Western world. The market is very nervous."

Those nerves were reflected in the market's moves this past week, as stocks on Monday sold off for the third straight day, then bounced back Tuesday after the Federal Reserve said it would put up cash to help loosen tight credit market. After a modest decline Wednesday, it got a lift Thursday from Standard & Poor's prediction of an end to massive write-downs of mortgage-backed securities, then dropped sharply Friday following Bear Stearns' revelation.

For the year, the Dow Jones industrial average is down about 10 percent, and off nearly 16 percent since its October high. The S&P 500 index has slipped 12 percent since the start of the year, and about 18 percent since October. The Nasdaq composite index is down about 16 percent for 2007, and off more than 22 percent since its October high -- officially within "bear market" territory.

David Wyss, chief economist for Standard & Poor's said he thinks several factors will likely mean the markets should hit their low point soon. "I think the economy is going to hit bottom in the summer," he said. "Normally, the market leads the economy by about three months," which would put the bottom sometime near the end of March, he suggested.

While there's still plenty in the economy to be worried about, Wyss said, he thinks that signs of a recovery in the market will be helpful in easing investor fears. "I think people are going to have a little more confidence," he said, adding, however, "It doesn't mean they're going to be back to normal."

The coming week could bring some news that helps. Along with the Federal Reserve meeting that is expected to deliver another big interest rate cut, several major investment banks, including Bear Stearns, are slated to report their first-quarter financial results. Most major corporations will follow starting next month.

Global investment strategist Subodh Kumar expects the earnings reports will produce some difficult numbers, but that could help in the long run. "I think there's one more leg of earnings reductions that the analysts haven't taken yet," he said. "What I'm anticipating is that as the first-quarter earnings are reported, (analysts) will cut their second quarter estimates and that will help us find a bottom. In terms of the market drop, I think most of that has already been done," he said. "In terms of expectations, in terms of earnings, I think there's more to come."

Brett Hammond, chief investment strategist at TIAA-CREF Asset Management, agreed that first-quarter results are not likely to be pretty. "Overall, I think we can expect some fairly negative news on the corporate front," he said, noting that, among other factors, financial companies are probably not done writing down the value of certain holdings.

He also said the credit crisis must also play itself out before market turns. "The story over the last quarter or so is the 'sound of credit crunching' can be heard everywhere, and I think that's what driving both reality and perception," he said. "You have to talk about both reality and perception when you're talking about turn."

Still, Hammond said, while it might take a few more quarters before the markets show signs of real strength, "the chances of there being a much further downturn from here are less than there's going to be an upturn."

Bear Stearns Bailed Out by Fed and JPMorgan

On the Brink of Collapse, Bear Stearns Gets a Lifeline From a Rival and the Feds.

On the verge of a collapse that could have shaken the very foundations of the U.S. financial system, investment bank Bear Stearns Cos. was bailed out Friday by a rival and the federal government. The near-miss raised new alarm about the credit crisis -- and whether other big firms might be in jeopardy.

The rescue came from JPMorgan Chase & Co. and, in an extraordinary step, the Federal Reserve, both rushing to pump new money into the venerable Wall Street firm after its financial state deteriorated so much in a 24-hour period that it threatened to fail.

Bear Stearns stock lost nearly half its market value, about $5.7 billion, in a matter of minutes, and pulled the broader market down with it. The Dow Jones industrial average fell nearly 200 points. If Bear Stearns were to go under, "it has the potential of bringing down the whole market," said Richard Bove, an analyst at Punk, Ziegel & Co. "This is the crescendo of the crisis."

JPMorgan and the central bank agreed to extend loans for 28 days to Bear Stearns, the nation's fifth-largest investment bank and the one hit hardest by the subprime mortgage mess. Two hedge funds managed by Bear Stearns failed last summer, setting off a credit crisis that has swept up banks and brokerages around the globe.

In backing up JPMorgan, the Fed dusted off a rarely used, Depression-era provision to provide loans. It also said it was ready to step in to fight an erosion of confidence in the nation's largest financial institutions.

Officials from the Fed and the Securities and Exchange Commission held conference calls throughout the day Thursday to assess the potential impact on the broader economy, according to a Treasury official, who spoke on condition of anonymity because of the sensitive nature of the discussions.

For Bear, the crisis started when market speculation grew that it might have to seize collateral -- mostly mortgage-backed securities worth next to nothing -- from the private equity firm Carlyle Group. Carlyle runs a bond fund and has come under intense pressure during the past week from creditors demanding collateral to back their investments.

As speculation swelled in the market, investors, customers and lenders raced to withdraw their money or rescind their credit lines. By Thursday night, Bear Stearns Chief Executive Alan Schwartz said, the bank realized the withdrawals might outpace the bank's resources -- so it reached out to JPMorgan for help.

JPMorgan, the nation's third-largest bank, has been hurt far less by the mortgage mess than other financial institutions. It will provide secured loans to Bear for four weeks -- insured, in essence, by the Fed.

Schwartz said it would buy Bear time and allow it to convince customers "that we have the ability to fund ourselves every day, to do business as usual." No one has disclosed how large the financing offered to Bear Stearns is. The CEO also confirmed -- as many on Wall Street had suspected -- that Bear Stearns could be up for sale. He told analysts on a conference call that the bailout is a "bridge to a more permanent solution."

Bear is working with investment bank Lazard Ltd. to explore its options. That may include an outright sale of Bear Stearns to JPMorgan, something top executives from both banks were discussing, according to a person familiar with the talks who was not authorized to speak on the record.

JPMorgan is considered to have one of the strongest balance sheets among Wall Street banks, and is not already involved in a rescue like Bank of America's purchase of Countrywide Financial Corp., the nation's largest mortgage lender.

Bear Stearns, which has about 14,000 employees worldwide, has struggled since the two hedge funds under its control lost billions of dollars after investing heavily in securities backed by pools of subprime mortgages.

"They were the dominant firm for repackaging mortgages," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group. "That's where all earnings came from. They had the least-diversified earnings stream of all of Wall Street securities firms, and as a result, they're paying the price today."

As delinquencies and defaults swelled among subprime mortgages, investors shied away from buying securities backed by the troubled loans. Those fears expanded to encompass all but the safest bonds and securities, forcing investment banks to significantly reduce the value of their holdings and drying up money throughout the market.

Bear Stearns has racked up $2.75 billion in write-downs since last year, and releases first-quarter results on Monday that could show more losses. The bank lost $859 million during the quarter that ended Nov. 30, a stark contrast to its $558 million profit during the same period just one year earlier -- before the credit crisis.

The broader financial services sector has racked up nearly $160 billion in write-downs since the middle of last year. "My guess is by next week, there will be rumors of other large, familiar institutions" that could be in trouble, said Anil Kashyap, a professor at the Graduate School of Business at the University of Chicago.

JPMorgan said it would not expose itself to any serious risk by helping Bear, but its shares dropped anyway, down $1.57, or about 4 percent, to $36.54. Bear stock plummeted 47 percent, or $27, to $30.

Approved Budget Smacks Bush's Tax Cuts

Senate Approves Federal Budget That Would Torpedo Hundreds of Billions of Dollars in Tax Cuts.

The Senate rejected calls from both parties' presidential candidates to take an election-year break from pork-barrel spending as a Democratic-run Congress passed budget plans that would torpedo hundreds of billions of dollars in tax cuts won by President Bush.

John McCain, the GOP nominee-to-be, couldn't attract even a majority of Senate Republicans to vote with him Thursday night behind the earmark moratorium touted by party conservatives as a way to restore the GOP's credibility with voters. It failed on a 71-29 vote. Only three Democrats joined with Hillary Rodham Clinton and Barack Obama in voting for it.

The underlying House and Senate Democratic federal budget plans for 2009, though nonbinding, drew blasts from Republicans for allowing some or all of Bush's tax cuts to die in about three years.

The House passed its $3 trillion budget plan by a 212-207 vote. It would provide generous increases to domestic programs but bring the government's ledger back into the black, but only by letting all of Bush's tax cuts expire at the end of 2010 as scheduled.

The Senate passed a companion plan by a 51-44 vote. It endorsed extending $340 billion of Bush's tax cuts but balked at continuing all of them. The competing versions head to talks in which the House is all but certain to accept the Senate's position endorsing tax cuts for the working poor, married couples, people with children and for those inheriting large estates.

All three major presidential candidates interrupted their campaigns for a Senate vote-o-rama that began before noon and included more than 40 roll calls. Maine Republicans Susan Collins and Olympia Snowe crossed over to support the bill; Evan Bayh of Indiana was the sole Democrat to vote no.

Budget plans are nonbinding, but they highlight the difficult choices on taxes and spending facing the next president and Congress. Binding votes on the expiring Bush tax cuts will be left to his successor and the Congress that's elected in November.

The practice of inserting "earmarked" spending into legislation is seen by lawmakers in both parties a birthright power of the purse awarded to Congress by the Founding Fathers. Earmarks have exploded in number and cost in recent years, accompanied by charges of abuse and public outrage over egregious examples like the proposed "bridge to nowhere" in Alaska, which would have cost more than $200 million to serve an island with a population of about 50.

McCain, who has battled with members of both parties over them for years, blamed pork barrel spending for the Republicans losing control of Congress in the 2006 elections. "This may be the last bastion in America where they don't get it," he told reporters after Thursday night's vote. "Americans are sick and tired of the way we do business in Washington. As president, I promise the American people ... the first earmarked, pork-barrel bill that comes across my desk, I'll veto it."

However, on taxes, the Arizona Republican voted to extend the full roster of Bush's tax cuts, which he opposed seven years ago as being tilted in favor of the wealthy. Democratic rivals Clinton of New York and Obama of Illinois both voted to extend only some of Bush's tax cuts while allowing cuts in income tax rates and investments expire. They joined other Democrats in a 52-47 vote against extending $376 billion of them.

Republicans hope to use the votes as fodder for the heated presidential campaign and for congressional races. "Democrats are quietly but very assuredly paving the way for a massive, economy-choking, tax increase," said Rep. Jim McCrery, R-La.

Democrats said the plans would reverse years of deficits that have piled up during Bush's tenure. They said he squandered trillions of dollars in projected surpluses that he inherited in 2001. "The Democratic budget continues to move our nation in a new direction and to clean up the fiscal train wreck caused by failed Republican economic policies over the last seven years," said House Majority Leader Steny Hoyer, D-Md.

Democrats argued that when the time comes, they'll renew tax cuts aimed at the middle class by closing billions of dollars worth of corporate and other tax loopholes. They also say billions more can be raised by cracking down on tax cheats.

In the House, Democrats defeated a GOP plan that would have extended Bush's reductions. The Republican plan also would have eliminated the alternative minimum tax, which was originally designed years ago to make sure rich people pay at least some tax but now threatens more than 20 million additional taxpayers with increases averaging $2,000.

Some 38 mostly moderate Republicans voted against their party's plan, which would have made cuts in popular programs like Medicare, housing, community development and the Medicaid health care program.

Congress' annual budget debate involves a nonbinding resolution that sets the stage for later bills affecting taxes, benefit programs such as Medicare and the annual appropriations bills. Unless such follow-up legislation is passed, however, the budget debate has little real effect and is mostly about making statements about party priorities.

This is such a year. Congress rarely tackles difficult budget issues as elections loom, and a standoff with Bush means that Democrats may even take a pass on advancing the 12 annual appropriations bills.

The first year of an administration is typically when heavy lifting on the budget is done, but all the candidates' campaign plans seem to promise more than they can deliver. McCain's tax cuts would require applying a meat cleaver to spending, while the Democrats promise spending that would enlarge the deficit or require large tax increases. The White House forecasts the deficit for the current year at $410 billion, a near record.

Democrats trumpeted their plan for putting the budget back in balance while also making investments in infrastructure, education, community development, clean energy and other programs. It also would avoid $196 billion worth of Bush-proposed cuts to Medicare and the Medicaid health care program for the poor and disabled.

EU Inflation Revised Higher, Banks Urged to Reveal Losses

Euro Area Inflation Revised Up to 3.3 Pct in February.

Higher prices for fuel, heating, dairy products and bread pushed inflation in the euro currency zone to 3.3 percent in February, well above the European Central Bank's target, the European Union said Friday.

The EU statistics office Eurostat revised upward a first estimate of 3.2 percent for the month, the same figure for January. Soaring inflation puts pressure on the central bank and finance ministers of the 15 nations that use the euro to curb racing costs for basic goods.

Worried about tight credit conditions, the ECB has so far held off raising interest rates that would help cool inflation -- now well above its recommended guideline of just under 2 percent. Instead it has called on others to avoid a price spiral, telling unions and governments to avoid big pay increases.

Price increases risk hurting the economy because they discourage shoppers from making bigger purchases over worries about shelling out more for groceries and gasoline. Consumer confidence -- one of the main drivers of economic growth -- froze last month.

Inflation in the EU's largest economy, Germany, was 2.9 percent. The Netherlands -- at 2 percent -- was the only country with a lower figure. Inflation in France was 3.2 percent. Some of the smaller euro nations had higher rates. Slovenia tops the scale at 6.4 percent, with Greece at 4.5 percent and Spain -- hit by a slowing housing market -- was at 4.4 percent.

Fast-growing eastern European states saw huge surges, a trend that will make it difficult for them to join the euro soon. Latvia's inflation rate was a massive 16.5 percent, Bulgaria was 12.2 percent and Estonia 11.5 percent. Eurostat had some comfort for shoppers, saying prices for telecoms, cars and clothes have fallen from a year ago.

EU Leaders Asks Banks to Reveal Losses

EU leaders urged international banks to help calm markets by revealing recent losses, wrapping up two days of talks that come to a close Friday with a report showing inflation in the euro area hit a new high. Yearly inflation in the 15 nations that share the euro hit a revised 3.3 percent last month, the EU statistical agency said Friday -- setting a new record as prices for oil and food surged.

The dollar's extended slump was central to the discussions. Just as Slovenian Prime Minister Janez Jansa called the euro's strength a a "serious issue," the euro hit a new high against the U.S. dollar, peaking at $1.5652. A more expensive euro makes German cars and French wines tougher to sell to the EU's biggest trade partner, the U.S. A strong euro, however, could ease inflation by cutting the import bill for dollar-priced oil.

The dollar has declined on pessimism about the U.S. economy, which has fed expectations that the Federal Reserve will continue to lower interest rates to jump-start the economy. EU leaders insisted in a draft declaration that the fundamentals of the economy remain strong. But the main lever to curb soaring inflation and runaway exchange rates -- interest rates -- lies outside their hands, and in the control of the fiercely independent central banks.

EU leaders urged member nations to hold off measures such as fuel taxes that would take more money out of shoppers' pockets as they shell out more for basics. The leaders plan to issue a statement expressing concern about "fragile" financial markets with credit tight and banks reluctant to disclose losses from complex investments in U.S. mortgage-backed securities. Those securities began to unravel rapidly last summer.

Banks worldwide have written off more than $150 billion in the past half-year, including large fourth-quarter write-offs by major European banks like UBS AG and Credit Suisse. Yet Standard & Poor's Ratings Services said Thursday it estimates writedowns of subprime asset-backed securities could reach $285 billion globally, up from its previous projection of $265 billion.

The statement from the EU will urge banks to provide "prompt and full disclosure of exposures to distressed assets." They stressed that the financial industry must heal itself by upgrading valuations and reforming credit rating agencies, warning that governments stand ready "to take regulatory and supervisory actions where necessary."

Gold Hits $1000 Benchmark While Oil Hits New Record $110

Gold Futures Hit $1,000 Benchmark on Declining Dollar, While Crude Oil Price Hits New Record at $110 a Barrel.

Gold futures hit $1,000 an ounce for the first time Thursday, pushed past the benchmark by the sinking dollar and record crude oil prices. The dollar fell below 100 yen during Asian trading Thursday, its weakest level against the Japanese currency in 12 years. The dollar also dropped to all-time lows against the euro. After reaching $1,001 on the New York Mercantile Exchange, gold for April delivery dropped slightly to $999.70 by midmorning Thursday.

Gold has been pushing up against the $1,000 an ounce mark for weeks, mainly because of the weaker dollar. Interest rate cuts -- and the prospect of more on the way -- have weakened the currency so much that foreign investors can buy dollar-based commodities like gold and oil more cheaply.

Investors have been expecting gold futures to rise to $1,000 as they watched the dollar spiral lower, said Scott Meyers, senior trading analyst with Pioneer Futures, a division of MF Global. Gold has been steadily creeping closer to the record after rising nearly 32 percent in 2007.

The dollar's decline and the boost in the price of oil price merely added the extra push. "We're getting a scenario where commodities are the place to be today," Meyers said. "With the weak dollar, it's hard to be against them." Meyers declined to speculate on how high gold could go, saying, "to pick a top is a foolish game to play at this juncture."

The Federal Reserve's meeting next week could provide more encouragement for gold prices since the Fed is widely believed to be considering cutting interest rates again. Another rate cut could reduce the dollar's value further, making gold an even better investment.

Oil Prices Set New Highs Above $110

Oil prices on Thursday hit a record high above $110 a barrel as investors fled the tumbling dollar that fell to new lows against the euro and a 12-year low versus the yen. Light, sweet crude for April delivery rose 78 cents to reach $110.70 in early afternoon European electronic trading on the New York Mercantile Exchange. On Wednesday, it had set a record trading high of $110.20 a barrel.

The greenback's decline has played a role in a surge in crude futures, which have hit record territory in 11 of the past 12 sessions, despite the fact that crude supplies have risen 10.2 percent since early January.

"The dollar will remain the dominant factor until the Fed meeting next Tuesday but oil will also have to balance with equities under the pressure of more credit hedge funds going bellyup," said Olivier Jakob of Petromatrix in Switzerland, referring to the U.S. Federal Reserve.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is weak. "Oil and other commodities have an intrinsic value so that to the extent that the U.S. dollar depreciates, (oil) becomes relatively cheaper in terms of other currencies, such as the euro," said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney. "So you get an adjustment to compensate for that effect."

Oil prices initially fell Wednesday in New York trading after the U.S. Energy Department's Energy Information Administration, or EIA, said crude supplies rose 6.2 million barrels last week, more than three times the 1.6 million barrels forecast by analysts surveyed by Dow Jones Newswires. But buyers quickly returned to the market. "I think the weakness of the U.S. dollar was a key part of that," Moore said.

The EIA also reported that gasoline supplies rose 1.7 million barrels last week, well above the expected 300,000 barrel increase, and distillate supplies dropped 1.2 million barrels, less than the expected 2 million barrel decline.

It was the eighth increase in crude supplies in nine weeks, putting oil inventories back on a growth track after a one-week decline. Meanwhile, forecasters including the Energy Department, the International Energy Agency and OPEC have consistently reduced their demand growth predictions for this year.

Wednesday's EIA report offered more evidence demand is falling: Gasoline consumption fell 0.7 percent last week compared to the same week last year. Normally, gasoline consumption grows about 1.5 percent year-over-year, just to keep pace with population growth.

Many analysts argue that current oil prices can't be justified by the market's underlying supply and demand fundamentals. Yet evidence of weak demand amid growing supplies has not stopped oil prices from rising in the past, particularly when the dollar is falling. "Some investors are apparently viewing oil and other commodities as providing something of a hedge against U.S. dollar weakness and possibly inflation concerns as well," Moore said.