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Will Fed Opt For Another 50-Point Cut?

By John S. McClenahen Will the U.S. Federal Reserve opt for a 25-basis-point cut in short-term interest rates? Or another 50-point reduction? The answer to that question will be known in a week. And unlike a week ago, the betting now is that Chairman Alan Greenspan and his colleagues on the rate-setting Federal Open Market Committee (FOMC) will opt for a 50-basis-point cut, dropping the influential federal funds rate to 3.5% from 4%. "With near-term economic weakness now looking to be more than earlier expected, the odds in our view have shifted to 60-40 that the Fed will enact its sixth 50-basis-point reduction of the year at the June 26-27 FOMC meeting," says Maury Harris, chief U.S. economist at UBS Warburg LLC, New York. "If instead the Fed does ease by just 25 basis points at the end of June, then there likely would be a further 25-basis-point reduction at the following FOMC meeting on Aug. 21," Harris believes. Bruce Steinberg, chief economist at Merrill Lynch & Co., New York, who like Harris previously anticipated a 25-basis-point cut, now also expects the FOMC will opt for a 50-basis-point cut in the federal funds rate. "We don't believe there is much chance that the Fed will end up overstimulating the U.S. economy," says Steinberg. "Because the growth potential of the U.S. economy has risen so much, the current slowdown is creating lots of slack, even as the economy remains short of a full-fledged recession."

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