---- by SIMON DUKE & GREG ROBB ---- SAN FRANCISCO (AFX) - The Federal Reserve's decision to cut interest rates by 50 basis points will go some way to strengthen fragile sentiment towards the stockmarket, but a further cut of the Fed funds target rate to 5.0 pct by mid-year is likely and needed to provide a sustainable rally, economists and analysts said. The rate cut, coming as it did in between meetings of the policy-making Federal Open Market Committee, represents a dramatic attempt to stave off a recession, increasing signs of which have been blighting U.S. equities in recent months, they said. The FOMC cut the target for its Federal funds rate to 6.0 pct from 6.5 pct and the Fed board followed with a related cut in the symbolic discount rate to 5.75 pct from 6.0 pct and invited Fed district banks to request a further discount rate reduction to 5.5 pct. Most analysts expect the Fed funds rate to fall to 5.0 pct or lower by the middle of the year. James Glassman, senior economist at JP Morgan Chase, said a further 50 basis point rate cut by the FOMC on Jan 31 is "quite likely," but said the cut may only be 25 points if the market stabilizes over the next three weeks. Glassman said the timing of the FOMC moves is not important, but said the central bank must "get its foot off the brake" by reducing the Fed funds target rate from 6.5 pct to 5.0 pct during the first half of the year. He added the Fed "may need to step on the gas a little" by lowering the Fed funds rate below 5 pct. Mike Moran, chief economist at Daiwa Securities America, forecasts another 50 point reduction in the Federal funds rate by the end of March. Another 50 point reduction is likely in May and June, he said, bringing the funds rate to 5.0 pct by the FOMC June 27 meeting. "This is the first step in the Fed throwing the markets a lifeline. I think we will see additional relief down the road here," said Warren Lovely, economist at Nesbitt Burns in Toronto. "We could see them take additional steps at the Jan 31 meeting, but right now we're going to have to see the (economic) data," he said. "It could come in late January, but if the data hold up better than expected, you could see them take a pass," Lovely added. Carl Tannenbaum, senior vice president at ABN AMRO/La Salle National Bank, said he expects the Fed funds rate to be lowered to 5.5 pct by mid-year. The next move may not come until the March 15 meeting, he said. Other economists said the recent lower level of equity markets likely represents a floor from which the markets can rebuild, noting that today's rate cut will not have a real impact until next year, with some effect on the economy surfacing in the second half of 2001. Economist Kevin Logan at Dresdner Kleinwort Benson said the cut "lessens the chances of a hard landing and improves the outlook for companies and their profits." A continued rally amongst equities will depend on how quickly the economy can manage to stabilise, Logan said. However, the cut will have a positive effect on key factors like investor confidence and market psychology, he said. "It's a bit like taking medicine. You may see some positive effects immediately, even though the disease isn't cured instantly." "So much of what separates a hard landing from a soft landing is psycology...where the rate cut will give us a boost right away is in the impression that the Fed will do its best to keep the expansion going," ABN Amro's Tannenbaum said. Although recent economic numbers -- such as yesterday's NAPM index which fell to its lowest level since the last economic downturn in 1991 -- suggested an imminent easing of monetary policy, few investors were expecting the Fed to cut rates so soon. "Moving prior to the Jan 31 meeting will give an important psychological boost to investors and will dramatically reduce the odds of the U.S. economy slipping into recession," said Alan Skrainka, chief market strategist at Edward Jones. Weatherly Securities' analyst Barry Hyman agreed that the cut would help restore investor confidence in U.S. equities, and reverse the gloomy sentiment that has weighed on the market in recent weeks. "This will certainly stabilise the market. Let's hope people don't then start thinking about the fact there's an (economic) problem." However, Barclay Capital's Henry Willmore, who is forecasting a further 50 basis point reduction in rates in the first half, questioned whether today's easing will give stock markets a sustainable boost in the short term. "The equity market will not necessarily go straight up from here - I think we'll see some bouncing around," Willmore said. Ryan, Beck & Co strategist Jay Suskind agreed, saying today's sharp rally is likely to be a short term one. "We have to remember why the Fed did this and that doesn't bode well for (company) earnings," which will likely disappoint, he said. "People are going to go home today and say: 'Wow, the economy is in bad shape,' and investors need to figure out what they want to buy." Analysts agreed that today's rate cut is unlikely to be the Fed's last downward move. "This is a really dramatic move, but it's just the beginning of the cycle - the ball is rolling, and the Fed now seems to be on the side of the equity markets," said Hyman. Skrainka, who noted that the Fed "rarely moves once," agreed interest rates could come down a further 50 basis points by the end of the year. The Thomas Weisel economist is also looking for rates to fall by a further 50 basis points in the first quarter of 2001. Analysts rejected suggestions that the dramatic easing of rates smacked of a panic reaction to an ever worsening economic backdrop. "I don't think its a panic move and should not be seen as negative in any way," Skrainka said, adding: "The Fed is right on the money with this rate cut." While conceding that the unparalleled cut may have appeared reactive, Thomas Weisel Partners' Matt Johnson agreed it could only be viewed in positive terms. "At first glance, it seemed like a panic move, but I think it bodes well for the market looking forward," Johnson said. "Today's move will give back confidence to market players as it will restore both consumer and business confidence." "I think anything more than 50 basis points would have been construed as a panic move, but I think its just Greenspan saying 'look, we've seen enough," Nesbitt Burns' Lovely said. "The fact that they went today clearly indicates that Greenspan and company have seen enough in terms of economic weakness and stock market selloff," he added.