Fed move seen restoring credibility

By Caroline Valetkevitch

NEW YORK (Reuters) - The Federal Reserve's move to join with other central banks to ease the global credit crunch could help restore its credibility after stock investors criticized its latest rate action, a senior portfolio manager said on Wednesday.

"The credibility factor is there," said Tom Metzold, portfolio manager of the Eaton Vance National Municipals Fund in Boston, at the Reuters Investment Outlook 2008 Summit in New York.

"The Fed was smart enough to realize that there was a possibility the market would not embrace 25 basis points, and therefore had a contingency plan in place under those circumstances," he said.

On Tuesday, major stock indexes fell more than 2 percent after the Fed cut interest rates by only a quarter percentage point. While a rate cut was expected, the action was considered modest and the accompanying statement failed to reassure investors that more cuts are coming.

The Fed, which had come under some criticism for being behind the curve during the credit crisis, in concert with other central banks early on Wednesday said they would work together to address pressures in the short-term funding market. As part of the action, the Fed will launch a temporary auction facility that banks can use to secure loans at its discount window.

Metzold, who oversees $8 billion in assets, said he was surprised by Tuesday's market reaction.

"The market did want 50, but maybe I misunderstood how much the market wanted 50 basis points," he said.

Metzold said the equities market tends to focus on "short-term trading and short-term thinking," while the Fed needs to be careful about overreacting and letting itself be dictated to by the markets.

"An inflationary spiral is much more damaging to the economy than an economic slowdown and a recession," he said.

Metzold said Wednesday's announcement will likely have some longer-term calming effect.

"I would like to think it will and I do think it will," he said. He said the Fed probably wanted to see how the markets would react to Tuesday's cut before unveiling the collaboration plan.

"I think it was something that the Fed kept in its back pocket ... (and) was hoping it didn't need."

Stock futures shot higher after the plan was announced, and all three major U.S. indexes were up in afternoon trading.

Metzold said he's been a fan of Fed Chairman Ben Bernanke from the start. "I've always liked his stance on stamping down inflation spirals."

(For summit blog: summitnotebook.reuters.com/)

(Additional reporting by Jennifer Ablan; editing by Leslie Adler)