---- by Justin Cole ----
WASHINGTON (AFX) - The Federal Open Market Committee will cut its key federal funds target rate by 25 basis points later today to 1.75 pct as the ten straight rate cuts so far this year have failed to stem the rising tide of widespread layoffs, economists said. Although the economic downturn has shown some signs of abating in recent weeks -- the Dow Jones Industrial Average broached the important psychological barrier of 10,000 for the first time this week since early September -- a majority of economists say further rate cuts are needed to ease the economy out of recession. "The economy is in a recession and the Fed needs to do more. We don't see the economy bottoming out until March of 2002," said Kenneth Kim, a US economist at Stone & McCarthy Research Associates in Princeton, New Jersey. A 25 basis point cut by the FOMC would mark the eleventh straight reduction in the fed funds rate in almost as many months from a rate of 6.5 pct in early January. The current 2.0 pct rate reflects the lowest rate since Sept 1961. Stone & McCarthy is calling for a 25 basis point reduction in the fed funds rate as is the economics team at Barclays Capital in New York. "We have data that point to a recovery next year, but the labor market numbers still look quite soft and the Fed is quite sensitive to that," said Henry Willmore, senior US economist at Barclays Capital in New York. The weaker-than-expected Labor Department November jobs report, published Friday, showed total US nonfarm employment declined by 331,000 from the previous month and that the unemployment rate rose to 5.7 pct from 5.4 pct in October to its highest level since Aug 1995. The Fed is sensitive to employment data because of its impact on consumer spending which accounts for some two-thirds of GDP growth. The FOMC has cut the fed funds rate target by 50 basis points three times since Sept 11. A 25 basis point cut would represent a return to the more gradual easing approach the FOMC had shifted to in June of this year. Most analysts do not expect a deeper, 50 basis point cut later today. Ian Shepherdson, a US economist at High Frequency Economics in Valhalla, New York State said Friday's employment report "cements (this) week's 25 basis points easing, but no more." Although the 10 rate cuts so far this year are helping to underpin the ongoing strength in the housing market through lower mortgage rates, the need to drive forward fresh consumer spending will spur the FOMC to keep cutting rates, economists said. "The risk is now that the Fed cut by 50 basis points, but we anticipate another 25 basis points, with (further) 25 basis points at the Jan 30 meeting, taking the funds rate to 1.5 percent," Ian Morris, a US economist at HSBC Securities in New York, told clients in a briefing note. Some economic commentators have suggested that Fed does not have much more room for manoeuvre in terms of cutting rates -- the real fed funds rate, after accounting for rates of inflation, is now negative, for the first time since 1993 -- but economists who spoke to AFX News said the Fed still has some rating-cutting powder in reserve if further cuts are needed early next year. The Nov 8 published minutes of the last FOMC meeting also suggest that the interest rate policy committee is likely to ease monetary conditions further. In those minutes, which noted that the balance of economic risks remain weighted to the downside, the Fed indicated serious concern about the state of the global economy and gave scant indication that the rate cutting regime was approaching an end in a strong statement that surprised some economists. "If they feel the need for 50 is justified then they will do it, but we think it will be 25. The statement from the last FOMC in November substantiates this," stressed Stone & McCarthy's Kim. He noted that the minutes from the last FOMC meeting show that only one district bank asked for a 50 basis point cut in the discount rate, and in prior meetings more than a few have asked for a 50 basis point reduction. This disparity indicates that most district banks feel that the end is near in term of rate cuts, and that today's meeting is unlikely to yield a 50 basis points reduction in rates. Other economists were just as resolute that today's meeting will result in a 25 basis points reduction in the fed funds rate. Such an expectation has been priced into the fed futures market for some weeks now. "It's a done deal, they'll do 25, if there's any risk, it's that there will be more rather than less," said Robert McGee, chief US economist at Tokai Bank Ltd in New York, adding, however, that "there is a low probability priced in of any easing beyond this quarter point cut." Joshua Shapiro, an economist at Maria Fiorini Ramirez, agreed:"It looks like a 25 basis point cut will certainly be delivered." Several economists said that today's meeting might not mark the end of monetary easing, and that a further reduction in rates might be necessary at the next scheduled Fed meeting on Jan 30. Once again, consumer spending is likely to be a deciding factor going forward, they said adding that the annual Christmas sales season could be especially vital this year in determining a current low point in the fed funds rate.