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Paulson looks to calm markets Aug. 21: U.S. Treasury Secretary Henry Paulson tells CNBC that the U.S. will safely get through the current spreading credit crisis. If you have a dodgy connection, have patience with loading!

The credit crunch got attention in Washington D.C. on Tuesday but investors are still searching for evidence that the much sought-after cut in the federal funds rate from the current level of 5.25%, is on the horizon.

The Fed's rate-setting Federal Open Market Committee is scheduled to meet on September 18th but a rate decision could be made at any time.

Treasury yields rose in afternoon trading Tuesday after an early move downward and the price of one-month Treasury bills plunged, with the yield back up 87 basis points to 2.98% by the close of trading in New York. On Wall Street, the Dow Jones Industrial Average fell 30.49 points to close at 13090.86, up 5% in 2007. The Standard & Poor's 500 gained 1.57 to 1447.12, 2% higher year to date, while the Nasdaq Composite Index added12.71 to 2521.30 and is 4.4% higher in 2007.

Stocks had perked up by mid-morning after the end of a closed-door meeting between Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and Senate Banking Committee Chairman Chris Dodd, in which they discussed the financial upheaval.

Earlier Tuesday, Paulson, the former renowned deal maker at Goldman Sachs, said in an interview with the business channel CNBC that the credit turmoil will take some time to work put but the US economy is fundamentally sound.

“Credit is being repriced, reassessed across our capital markets,” Paulson said. “As the Fed addresses liquidity this makes it possible, this makes it easier, for the market to focus on risk and pricing risk. This will play out over time.”

Given his success as the kingpin of the masters of the universe at Goldman, you would think that Paulson would be the ideal man as Treasury Secretary to soothe nerves. However, Paulson isn't a great master of the television medium.

Following the meeting on Capitol Hill, Senator Dodd said that "the Fed gets it and understands" the credit squeeze, adding that he thinks the central bank's actions so far have been "very positive and constructive." He said Bernanke declared he is prepared to use "all the tools at his disposal" to ease the market's liquidity woes. Neither Bernanke nor Paulson commented after the meeting.

Bernanke is said to wish to avoid an emergency easing of monetary policy, contrasting with predecessor Alan Greenspan, who cut the federal funds rate target three times in 1998 after the collapse of Long Term Capital Management LP.

``We did use the fed funds rate and that may have been a mistake,'' former Fed Vice Chairman Alice Rivlin, who voted for the 1998 rate cuts, is reported as saying. ``It might have been smarter to try what they are trying.''

In the afternoon, the President of the Federal Reserve Bank of Richmond, Jeffrey Lacker, said in a speech that: "The Committee's (the rate setting Federal Open Market Committee) action last week underscores an important point. Financial market volatility, in and of itself, does not require a change in the target federal funds rate, in my view. Interest rate policy needs to be guided by the outlook for real spending and inflation. Financial turbulence has the potential to change the assessment of the appropriate rate if it induces a sufficient revision in growth or inflation prospects."

Lacker is viewed as an inflation hawk but currently doesn't have a vote on interest-rate moves.

Last week, the Fed lowered the discount rate that it charges on loans to banks. On Tuesday, it injected another $3.75 billion into the financial system, bringing the total funds that it has moved into the markets since last week to more than $100 billion. Also, the New York Fed said it is lowering the fee it charges as part of lending securities from its portfolio to 0.5% from 1%.

The Financial Times reports that in London, it emerged that Barclays, the UK’s third-biggest bank, borrowed £312m ($618m) under the Bank of England’s emergency facility on Monday, the first to tap the facility since the onset of the liquidity crisis. Barclays is thought to have taken out the loan after another big bank missed a scheduled payment.

HBOS, the UK’s biggest mortgage lender, also stepped in to support one of its specialist financing units with assets worth about $37bn after it was hit by the fallout in the credit markets.

Turmoil in the financial markets will affect growth worldwide, John Lipsky, the number two official at the International Monetary Fund, said on Tuesday.

In the first interview by a senior IMF official since the market turmoil intensified, Lipsky, a former senior banker at JPMorgan, told the Financial Times: “This undoubtedly will dampen economic growth.”

ECB loaning less money to banks

The European Central Bank loaned less money to banks than it did a week ago, mopping up emergency funding it had pumped into the money market to head off a credit crunch from August 9th. 

The ECB allotted €275 billion in cash to banks for seven days at an average rate of 4.09%. Banks are due to repay €310 billion today. The marginal rate was 4.08%t. A total of 355 banks made bids.

The ECB that it now plans to trim the ``large reserve surplus,'' a stance it says is consistent with a ``normalization of conditions'' in the money market.

The ECB added €211.3 billion of extra cash to the money market between Aug. 9 and Aug. 14. While that money has now been repaid, the ECB allotted more than  €70 billion above the stated benchmark at its last weekly tender. On Tuesday, it allotted €48 billion more than the benchmark.