Market makes partial recovery

The Fed said it expects moderate economic growth over time.

NEW YORK (AP) — Wall Street ended another tumultuous session with a sizable gain Tuesday, partly recovering from its worst sell-off in years after the Federal Reserve said it was keeping interest rates steady. The central bank soothed fears of a worsening financial crisis even as the market waited to learn the fate of troubled insurer American International Group Inc.

In a statement accompanying its decision, the Fed noted the growing strains in the financial markets a day after the Dow Jones industrials plunged 504 points in reaction to continuing turmoil in the financial sector. The Fed also noted the ongoing weakening of the labor market. But it also sought to give some reassurance by saying it expected its policy moves to foster moderate economic growth over time.

The Fed has cut its target federal funds rate by 3.25 percentage points to its current level of 2 percent over the past year. Many on Wall Street expected the Fed to keep rates steady, but there was some hope the central bank would try to calm uneasy financial markets with a rate cut.

Still, the fact that the Fed didn’t lower rates was a sign it doesn’t believe the economy needs that type of stimulus. It reiterated it believed its moves to inject more liquidity into the banking system to help struggling financial institutions would help them, and, in turn, the economy overall.

“This was the right thing to do,” said Tom Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles. “I just don’t think the Fed should be responding to the financial market crisis at this stage.”

He contends other moves, like broadening the type of collateral the Fed accepts from banks and adding money to the banking system are more effective at addressing credit troubles.

In related news, British bank Barclays PLC has agreed to buy at least some of the investment banking and trading operations of Lehman Brothers, a person briefed on talks said.

The person confirmed media reports that Barclays President Robert Diamond has addressed Lehman investment bankers to inform them of his company’s intentions. This person spoke on condition of anonymity because a final agreement had yet to be reached.

Lehman filed for Chapter 11 bankruptcy protection Monday. Barclays withdrew from weekend talks to rescue Lehman through an outright acquisition.