Banks, Fed to take stocks on rocky ride

By Kristina Cooke

NEW YORK (Reuters) - The rocky ride in U.S. stocks looks set to intensify next week with the survival of one of the biggest investment banks in doubt and regulators rapidly burning through options to limit more damage to the financial system.

All eyes will again be on Bear Stearns come Monday for any further word about the condition of the fifth-largest U.S. investment bank, which on Friday had to get emergency funding as fallout from the global credit crisis took its toll.

Bear Stearns is among four major Wall Street firms reporting earnings next week.

But the Federal Reserve's policy-setting meeting on Tuesday will be the focus of the holiday-shortened week. The U.S. stock market will be closed for Good Friday on March 21.

U.S. interest-rate futures on Friday showed more than a 50 percent chance that the central bank will cut its benchmark fed funds rate target by 100 basis points -- or 1 percent -- to revive an economy that many say is already in recession.

"Most of the focus will be on the Federal Reserve next week. Will the Fed cut rates? And if so, how much? And most importantly, what will the statement that accompanies the decision say?" said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York. "Frankly, the Fed said it all in their bailout of Bear Stearns."

Market participants have questioned the effectiveness of the U.S. central bank's efforts. On Tuesday, March 11, the Fed teamed up with other central banks to get up to $200 billion in fresh funds to cash-starved markets. The market rallied sharply for its best day in five years, but most of those gains were erased by the end of the week.

Then on Friday, Bear Stearns said a cash crunch forced it to turn to the Federal Reserve and JPMorgan Chase for emergency funds. That revived investors' fears about the depth and breadth of the credit crunch. Bear's stock tumbled as much as 50 percent on Friday to a session low at $28.42, its lowest since October 1998.