---- by Greg Robb ---- WASHINGTON (AFX) - The Federal Open Market Committee will hold interest rates steady at its meeting tomorrow but will signal to the markets its intention to cut rates quickly if the economy weakens further, analysts said. "They are likely to sit on their hands at the next meeting. Things aren't that bad right now -- we're not talking about the economy being a basket case," said Martin Bailey, former chief economist for the Clinton White House and now an economist with the Institute For International Economics in Washington. "But if the economy stays weak or gets weaker, I would expect to see further interest rate reductions -- I wouldn't be surprised to see 50 basis points, additional 75 basis points by the end of the year," Bailey said. Former Fed governor Llyle Gramley agreed. "While not doing anything...the FOMC will signal that it is going to do something reasonably soon." Most economists said it would be premature for the FOMC to cut rates on Aug 13 as the economy is currently not in such bad shape. The main worry is about where it might be headed. Analysts paint a picture of an economy that is at a crossroads right now, and it is still too early to know which road it will take. Most analysts still believe the economy can avoid a so-called double-dip recession, where the economy would experience one or more negative quarterly growth rates. But the risks are decidedly on the downside. "I think we make it through without a double-dip, although we'll need a little bit of luck," said Mark Zandi, chief economist at Economy.Com. "But the risks are decidedly on the downside. If any other little things goes wrong, it would be very debilitating. Confidence is very fragile, I don't know that it would take much to undermine it," he said. In the first half of the year, the economy was propped up by consumer spending, which offset weak business spending and a deteriorating trade balance. But, only in the last few weeks, the economy has been shaken by the sharp drop in investor confidence that stemmed from the disclosures of corporate greed. As a result, trillions in dollars in wealth has disappeared in the wake of the stock market declines. Analysts are still unsure how this will impact the economy, but suspect that the damage may be profound and long term. "It is likely we will see six to eight quarters of subpar growth, and gradually rising unemployment," as consumers reassess their financial position and begin to save more, said Former Fed governor Lyle Gramley said. "That in itself is enough to be worrisome for the Fed," he said, adding that the Fed more worried about possible deflation. Former White House economist Bailey thinks there is a "30-40 percent chance of continued stock market weakness and a slide back into zero or negative GDP growth." The economy is likely to grow at a sluggish 2.0-2.5 pct rate for the rest of the year, he said. Indeed, third quarter growth should be higher than the 1.1 pct rate in the second quarter due to a pickup in auto production following strong sales in July. So it is the fourth quarter and the first quarter of next year that are critical. "The fourth quarter and the first quarter will kind of be the decider whether we slide back into negative GDP or whether we are able to pull out into sustained recovery. I would say that is hanging in the balance right now," Bailey said. Another argument in favor of the FOMC holding rates steady, analysts said, is that Fed officials have not made the case for such a move in public. The Greenspan Fed is not known for surprising financial markets. "I think the Fed governors haven't prepared anyone for that (a rate cut)," Zandi said, "the last speeches they gave are all pretty upbeat. They really haven't done their normal spade-work." Indeed, when asked about a possible rate cut during his monetary policy report to Congress last month, Fed chairman Alan Greenspan ignored the thrust of the question and said only that the Fed's forecast called for a pickup in growth in the second half of the year. So most analysts agree that the Fed must make some formal statement after tomorrow's meeting about its economic outlook to take account for the change in economic circumstances. "I think they will have a friendly statement, it could come either in the form of a shift in the balance of the risk statement towards slower growth or just friendly sounding words in their description of the economy, but they will recognise somehow the slowdown that has emerged recently," said Mike Moran, chief US economist at Daiwa Securities America in New York. Such a statement would also give the FOMC the flexibility for an inter-meeting rate cut if warranted, economists added.