---- By Greg Robb ----
WASHINGTON (AFX) - The Federal Open Market Committee will next Tuesday cut its key short-term interest rate by 25 basis points to 3.5 pct and maintain a bias in favor of more easing given the uncertain economic outlook, according to a large majority of Wall Street analysts said.
"We expect a 25 basis point insurance cut," said Sung Won Sohn, chief economist with Wells Fargo & Co in Minneapolis. Although a 25 basis point rate cut was viewed as a "slam dunk" by analysts, there was little agreement on whether this would be the last of the Fed's rate cut of this cycle or not.
Many bearish analysts believe the US is tilting at the edge of recession, but just as many bullish economists believe the third quarter will show at least the start of a rebound that will allow Fed policy-makers to remain on the sidelines.
"Our view is this is going to be the last cut," said Joshua Shapiro, chief US economist at Maria Fiorini Ramirez. "The economy is weak now, but things are likely to improve -- albeit gradually," he said.
Even though the data is mixed, as the economy comes to an "inflection point," Shapiro said, the housing market is "doing just fine," helping consumer confidence and jobless claims have "stabilized".
Henry Wilmore, senior economist at Barclays Capital, said another factor leading to a turnaround would be the end of the inventory cycle. He pointed to Federal Reserve board chairman Alan Greenspan's comment during his recent Congressional testimony that "at some point, inventory liquidation will come to an end and its termination will spur production and incomes."
Inventories subtracted 2.61 percentage points from first-quarter growth and only added 0.03 percentage points to the second quarter's. Economists who believe the economy is poised to recover expect the lagging effect of previous six Fed rate cuts and the tax rebates -- putting 4.0 bln usd a week into the hands of consumers -- to help turn the economy around.
But other economists believe the economy has stalled and see no signs of an upturn. They expect more rate cuts to come. Economists at Bear, Stearns & Co expect the fed funds rate to hit a low of 2.75 pct by the end of the first quarter of 2002.
Goldman Sachs & Co economists told their clients this week that they now expect the federal funds rate to fall to 3.0 pct by the middle of next year.
Even though the economy might improve in the second half, the firm cut is forecast for growth in 2002 to a 2.0 pct GDP rise from the previous forecast of 3.5 pct.
Rus Shelton, economist at Nesbitt Burns in Toronto, said the Fed may be coming around to the view that there is a substantial global slowdown underway, requiring "easing with a vengeance by central banks."
Several economists said the FOMC should either cut by 50 basis points or leave rates unchanged. This would be a clear sign that the market needs about where the central bank thinks the economy is headed. "The idea that 25 basis points will solve all your problems is just hooey," said Joel Naroff, president of Naroff Economic Advisors in Philadelphia.
A 25 basis point cut could be "a waste of ammunition," Sohn of Wells Fargo agreed.
But most economists thing there is only a slim chance that the FOMC would cut rates by 50 basis points.