Market News International - The Federal Reserve's surprise inter-meetingcut in interest rates left Fed watchers in stunned amazement Wednesday,but few were prepared to say the Fed is finished easing credit conditions.Further rate cuts are a strong possibility at the May 15 Federal Open MarketCommittee meeting, analysts said. Without waiting for that mid-May policymeeting, Fed Chairman Alan Greenspan convened an 8:30 a.m. conferencecall, in which the FOMC members decided on an immediate 50 basis pointcut in the federal funds rate, at which banks borrow reserves from each otherovernight, to 4.5%. By a unanimous 5-0 vote, the members of the FederalReserve Board, who form the core of the FOMC, also voted to cut thediscount rate, at which the Fed itself lends to banks, from 4.5% to 4%. It wasthe fourth time this year that the Fed has cut rates. The Fed has now easedcredit by 200 basis points, leaving the funds rate 25 basis points belowwhere it was when it began raising rates in June 1999. The move came at atime when most of those who had been hoping for an inter-meeting rate cuthad begun to give up hope amid rising stock prices, some signs ofimprovement in the economy and upbeat comments by Fed officials. Inannouncing the cuts, the Fed reiterated some of those upbeat observations,saying that "a significant reduction in excess inventories seems welladvanced" and that "consumption and housing expenditures have held upreasonably well, though activity in these areas has flattened recently." TheFed statement also said, "the impressive underlying rate of increase" inproductivity of recent years "appears to be largely intact," although it"probably weakened" in the first quarter. But the Fed went on to explain whythose forces were not sufficiently positive to justify further delay in bringingrates down: "Nonetheless, capital investment has continued to soften andthe persistent erosion in current and expected profitability, in combinationwith rising uncertainty about the business outlook, seems poised to dampencapital spending going forward. This potential restraint, together with thepossible effects of earlier reductions in equity wealth on consumption andthe risk of slower growth abroad, threatens to keep the pace of economicactivity unacceptably weak." The Fed went on to note that the intervalbetween the March 20 and May 15 FOMC meetings is an "extendedintermeeting period." Stocks, which had already been continuing their rallybefore the 10:54 a.m. announcement, surged in its aftermath. The Dow Jonesindustrials were up more than 400 points around 1:00 p.m. EDT. The rate cutprompted major banks to slash their prime lending rate from 8% to 7.5%.Before the rate cut announcement, the Conference Board had announced thatits index of leading economic indicators fell 0.3% in March, but in good partdue to a decline in stock prices that had since been partially reversed.Earlier, the Commerce Department reported that the U.S. deficit on trade ingoods and services plunged by $6.3 billion to $27.0 billion in February, asimports fell $5.4 billion. The day before, the Fed itself had announced thatindustrial production rose in March for the first time since September.Although the narrowing of the trade deficit was a positive for first-quarterGDP, Nomura Securities senior economist Carol Stone said Greenspanundoubtedly noticed the $1.3 billion drop in imports of capital goods. Stonejoked that the Fed delayed cutting rates between meetings "until we gave itup." In addition to signs of reduced capital investment, she said the Fed wasprobably prompted to ease at this juncture because of recent poor earningsreports and layoff announcements. As for the chances of further easing at theMay 15 FOMC meeting, Stone said, "We think they still need to go somemore ... to buy some more insurance." She said a weak April employmentreport would be likely to yield a mid-May rate cut. "It may be only 25" basispoints, she said. Charles Lieberman, chief economist and partner ofAdvisors Financial, said the Fed eased now because "they wanted to makesure the expansion strengthened, and some of the recent data weresufficiently mixed" to cast doubt on the outlook. "It was obvious they wouldgo in May, and by going between meetings they had a chance to positivelyinfluence investor and consumer technology," Lieberman added. Liebermansaw the trade report as generally quite positive for the economy, noting thatthe import reduction reflects in good part "a pretty substantial inventoryadjustment." But he said the Fed wanted to be "proactive" in making surethat rising unemployment does not cause a deceleration of economic growth.Lieberman said it is "premature" to say whether or not the FOMC will cutrates again May 15. "I'm not sure they'll do anything," he said. "It dependson the data between now and then." "I would never have guessed it," J.P.Morgan senior economist James Glassman said of the rate cuts, but "itmakes total sense." Glassman said the surprise move will "go in the historybooks." He said the Fed showed a willingness to ease aggressively despite"some signs of better economic activity" because of its belief that theeconomy is "underperforming" its potential, given improved productivity.Glassman also observed that the Fed was "opportunistic" in moving at atime when stocks had rallied, so that people "can't say any one thingtriggered them." The Fed move also "shows they aren't shy about goingagainst the psychology of the market." Glassman said he believes the Fedneeds to bring the funds rate down to 4% and said the Fed's statement"leaves open the possibility" of a 50 basis point cut on May 15. But if theeconomy shows further improvement between now and then, "they won'tneed to do much." Gordon Richards, economist with the National Associationof Manufacturers, called the rate cuts "much-needed adrenaline for a weakeconomy" and "the right decision made at just the right time." "By cuttingrates in between meetings, ... the Fed has staved off a downward spiral andprecluded any long period of stagnation," Richards said. "Instead, we cannow look forward to a stronger recovery in the second half."