By Wayne Cole

SYDNEY (Reuters) – Asian shares staged a cautious bounce on Wednesday with hopes a global banking crisis would be averted vying with uncertainty over the outlook for U.S. interest rates as the Federal Reserve holds a high-stakes meeting on policy.

Efforts by U.S. Treasury Secretary Janet Yellen to calm nerves seemed to be working with bank shares rallying overnight. Government officials were also pondering increasing the limit on deposit insurance, though there was no agreement on this as yet.

Strains were still evident among regional U.S. banks with shares of First Republic Bank sliding on suggestions the government might be involved in a rescue deal, perhaps disadvantaging shareholders.

The unease left both S&P 500 futures and Nasdaq futures barely changed. EUROSTOXX 50 futures edged up 0.2%, while FTSE futures rose 0.1%.

MSCI’s broadest index of Asia-Pacific shares outside Japan added 1.3%, with Chinese blue chips up 0.3%. Japan’s Nikkei climbed 2.0% led by a rebound in beaten-down bank stocks. [.T]

The still brittle mood was evident in the latest BofA survey of global fund managers which found pessimism near its worst in the past 20 years amid fears of financial risk and a flight from bank stocks.

All of which puts the Fed in a tough position as it decides whether to raise interest rates later today.

Goldman Sachs, for one, argues the banking stress will cause a tightening in lending that is essentially the same as a rate hike so a pause would be warranted.

“The historical record suggests that the FOMC tends to avoid tightening monetary policy in times of financial stress and prefers to wait until the extent of the problem becomes clear, unless it is confident that other policy tools will successfully contain financial stability risks,” notes Goldman.

Analysts at JPMorgan, on the other hand, stand with the majority and flag a rise of 25 basis points in part because postponing a move until May would threaten the Fed’s inflation-fighting credibility.

They note the Fed could still soften its forward guidance by dropping its reference to “ongoing increases”, much as the European Central Bank did last week.

QT AND DOT PLOTS

An added complication is whether the Fed temporarily stops selling its holdings of Treasury debt, known as Quantitative Tightening, and what Fed members do with their dot plot forecasts for future rate hikes.

The latter will be a key focus as the market is all over the place on the policy outlook.

Having even priced in the risk of a rate cut last week, futures now imply an 86% chance of a quarter-point rise to 4.75-5.0%. Then again, a couple of weeks ago the market had been wagering on a half-point hike.

Investors have also swung back to expecting a further increase in May, but also imply some chance of a cut as early as July and rates at 4.25-4.50% by year-end.

How Fed Chair Jerome Powell navigates all this in his 1830 GMT news conference could well determine the course of markets for the rest of the week.

Bond investors will be hoping he can instil some calm given the wild volatility of recent days. Two-year Treasury yields were hesitating at 4.13%, having made a remarkable round-trip from 5.085% to 3.635% in just nine sessions.

European bonds have gone along for the ride. German two-year yields overnight recording the biggest daily jump since 2008 as markets went back to pricing in more ECB hikes.

That jump helped lift the euro to a five-week high of $1.0789 overnight, and it was last holding firm at $1.0770.

The dollar went the other way on the yen, where yields are still tightly controlled by the Bank of Japan, and rose to 132.40. Safe-haven demand for yen had seen the dollar as low as 130.55 early in the week.

In commodities, the mild improvement in risk sentiment saw gold fade back to $1,939 an ounce and away from Monday’s top around $2,009. [GOL/]

Oil prices eased after an industry report showed U.S. crude inventories rose unexpectedly last week in a sign fuel demand may be weakening. [O/R]

Brent dipped 41 cents to $74.91 a barrel, while U.S. crude fell 40 cents to $69.27.

(Reporting by Wayne Cole; Editing by Stephen Coates and Lincoln Feast.)