Unable to shake off credit market angst, Wall Street turns its attention to an upcoming Federal Reserve meeting where policymakers will attempt to restore market confidence.
Confidence was shaken again in the past week as investment giant Bear Stearns said it had gained emergency funds from the Federal Reserve Bank of New York and rival bank JPMorgan Chase to shore up its stretched finances.
Market participants said Bear Stearns' woes, triggered by mounting losses from mortgage-backed securities, and ongoing economic worries will likely spur the Fed to cut US interest rates at a policy meeting on Tuesday.
Most economists expect the US central bank to cut its key short term federal funds interest rate, but opinion is divided over the size of a possible cut. Analysts believe it will be between 50 and 100 basis points, marking a significant reduction in borrowing costs.
The Fed has slashed its fed funds rate by 225 basis points to 3.00 per cent since September in a bid to shore up economic momentum which is being threatened by a multiyear housing slump, a credit crunch, rising jobs cuts and skyrocketing crude oil prices.
Despite such turmoil, the stock markets mostly posted modest gains in the past week.
The leading blue chip Dow Jones Industrial Average rose 0.48 per cent for the week ended Friday to close at 11,951.09 points, although the index is down 10 per cent for the year to date.
The tech-heavy Nasdaq composite finished the week unchanged at 2,212.49 while the broad-market Standard & Poor's 500 index gained 0.40 per cent to 1,288.14.
"We are projecting that the FOMC will vote to reduce the federal funds rate by 75 basis points on March 18. There is an outside chance of a deeper 100-basis-point cut, given turbulent conditions in financial markets," economists at Global Insight said in a briefing note.
Market participants expect the Federal Open Market Committee (FOMC) to unleash another rate cut in the hope it helps the economy avoid a recession, although many analysts say the economy has already fallen into a downturn.
Traders said the Fed's Tuesday meeting will gain the most market attention in the coming week which will also see a flurry of economic reports released, including surveys on housing starts, producer price inflation and some forward-looking economic indicators.
Housing starts are expected to moderate to a seasonally-adjusted annual rate of 995,000 properties in February compared with 1.0 million in the prior month as the housing downturn shows no sign of abating.
Construction on new homes has plummeted by over 27 per cent in the past 12 months amid a widespread housing slump which has triggered financial problems for major banks such as Bear Stearns which own big portfolios stuffed with mortgage securities.
Headline producer price inflation (PPI) is expected to rise 0.3 per cent in February following a 1.0 per cent gain in the prior month while the core rate, which excludes volatile food and energy prices, is seen rising 0.2 per cent against a rise of 0.4 per cent in January.
Some economists fear inflationary pressures, especially soaring oil prices, could hamper the Fed's rate-cutting campaign, but Fed officials have signaled that they believe inflationary pressures could ebb because of slowing growth.
Some analysts cautioned that Wall Street's sharp gyrations will likely persist for some time.
"We believe continued deterioration in financial markets is going to weigh on an economy that is already contracting," Deutsche Bank economists said in a briefing note.
The Deutsche Bank economists predict the Fed will slash rates by 75 basis points to offset the credit crunch sweeping the financial markets.
Bond prices rose in the past week as some investors sought a safe haven from volatile stock markets.
The yield on the 10-year Treasury bond declined to 3.421 per cent from 3.541 per cent a week earlier, while that on the 30-year bond fell to 4.348 per cent from 4.541 per cent.
Bond yields and prices move in opposite directions. (AFP)
Wall Street angst persists as Fed rate meeting looms