Turmoil continues as the Fed exerts all its powers to try restore calm, writes Arthur Beesley, on Wall Street

FORMER FEDERAL Reserve chairman Paul Volcker made clear his admiration yesterday for Ben Bernanke, the current chairman.

"Given the limited powers and the pressures that he is under, I admire what all these people are doing," Volcker said. "The earth has moved," he added, referring to the turmoil that has rocked the financial world for weeks.

The earth didn't move yesterday when Treasury secretary Hank Paulson appointed former Goldman Sachs executive Neel Kashkari to run the Troubled Asset Relief Programme (Tarp), as the bailout is known. The Dow Jones, preoccupied with growing troubles in Europe and poor economic indicators at home, was defiantly on the slide all day, falling below the 10,000 mark for the first time in four years. Indeed, much talk now in markets centres on the likelihood of an interest rate cut, possibly before the Fed's next scheduled meeting on October 29th.

Following a line of reductions from 3.25 per cent since August 2007, the benchmark rate stands at 2 per cent. The Fed held rates steady at its last meeting.

Before markets opened yesterday morning, Bernanke moved to double the scale of the Fed's auctions of cash to banks to some $900 billion and said the Fed was considering further steps in the battle to unfreeze short-term lending markets.

"The Federal Reserve stands ready to take additional measures as necessary to foster liquid money-market conditions," the Fed said.

In line with a provision in the bailout legislation, the Fed also said it will begin paying interest on the cash reserves banks hold at the central bank. This step is designed to give Fed officials greater power to inject cash into banks without interfering with its benchmark interest rate.

So is a rate cut more or less likely as a result of this action? "Fed staff have argued that paying interest on reserves allows policymakers to separate the provision of liquidity from setting interest rates - and so today's decision could make it less likely that the Fed will lower interest rates," says Lewis Alexander, an economist with Citigroup.

"But that doesn't take into account what's actually going on in markets today. I don't think one should conclude that today because they did this that they are less likely to lower rates . . . Financial markets are under extreme stress. We expect the Fed to lower rates sooner rather than later."

Meanwhile, the hunt continues for a solution to the credit seizure. With industrial companies finding it hard to raise cash as banks hoard money, the stock market rout yesterday points to minimal immediate expectations from the Tarp. Kashkari has quite a task ahead of him.