By Glenn Somerville
WASHINGTON, June 27 - Federal Reserve policymakers are virtually certain to drop U.S. interest rates another notch on Wednesday to steady a swaying economy, analysts say, though how low they will go is an open question.
Fed Chairman Alan Greenspan and other members of the Federal Open Market Committee began a two-day meeting on Tuesday afternoon to consider a sixth rate cut this year amid high uncertainty whether it can maneuver past a risk of recession. The meeting was set to resume at 9 a.m. EDT (1300 GMT) on Wednesday.
The FOMC decision will be announced at about 2:15 p.m. EDT (1815 GMT) in a statement keenly awaited by the world's financial markets, which are eager to know the U.S. central bank's assessment of the flagging expansion's durability.
Analysts are split over whether the Fed will opt for a sixth hefty half-percentage-point rate cut or opt for a milder quarter-point reduction. But after brighter data emerged on Tuesday, debt markets, at least, were losing hope for the more aggressive move.
The Fed's key tool for influencing interest rates and credit is its control over the federal funds rate charged for overnight loans between banks. The rate, which influences charges that banks set on everything from credit card balances to consumer loans, now stands at 4 percent, its lowest level in seven years.
But even after five sharp interest rate cuts this year, uncertainty about the economy's future still reigns.
"Anecdotal evidence from companies still raises the question whether this economy has hit bottom or not," said economist Lynn Reaser of Banc of America Capital Management Inc. in St. Louis.
SIZE OF RATE CUT A TOSSUP
Reaser said it was "a virtual tossup" whether the Fed would continue the fast-paced tempo of half-point cuts that started in January -- totaling 2-1/2 percentage points to date -- or slow the rhythm to a quarter-point trim to signal it was winding down its easing campaign.
The rapid-fire rate cuts since January, including two relatively rare reductions outside the eight regularly scheduled FOMC meetings per year, have been the most aggressive in the nearly 14 years Greenspan has been at the Fed's helm.
The jury still is out on whether it will be successful in keeping a flickering 10-year-old expansion alight.
"There is a real risk of recession unfolding," said economist William Dudley of Goldman Sachs and Co. in New York, who is also chairman of the Bond Market Association's economic advisory committee. "But I don't believe we're in recession right now."
The unemployment rate has risen, industrial production slumped for an eighth straight month in May, and corporate profits are under pressure from weaker business at home and abroad. On the plus side, home building and sales have held up, and spending on goods like new cars has been relatively healthy.
"I believe that recovery is on the way," said economist Richard DeKaser of Cleveland-based National City Corp., who is looking for a quarter-percentage-point rate reduction.
TAX-CUT STIMULUS AWAITED
"I don't think we've gotten the benefit of the easing so far, plus we are awaiting the stimulus of the tax cuts that are to arrive in the third quarter, so the Fed doesn't need to do that much," he added.
Tax rebates are to start flowing in July, and lower income tax withholding rates are to kick in next week under the $1.3 trillion tax-reduction program pushed through Congress by the Bush administration.
That focuses nearly as much interest on the statement accompanying the Fed's rate decision as the size of the cut itself as analysts try to work out whether the rate-cutting dance is winding down.
"I think they'll suggest, in a relatively muted fashion, that they are nearing the end of their rate-cutting mode,"
Reaser said. "The guidance that they offer in the surrounding language will be critical."
In addition, analysts will watch closely for language that says the Fed intends to "monitor conditions closely" -- a phrase that many consider a signal that the U.S. central bank would be prepared to act again between scheduled FOMC meetings.
The next FOMC meeting is scheduled for Aug. 21, leaving a relatively lengthy eight-week interim as the economy struggles to avoid falling into the limbo of recession.