Need for lower interest rates in doubt

"This slow, jobless, inflation free recovery needs a boost from lower interest rates at the Fed meeting."

Thomas Duesterberg, president and CEO of the Manufacturers Alliance

Analysts are hedging their bets against heavy market speculation that the US Federal Reserve may cut interest rates tomorrow to avert the threat of the much feared "double-dip recession."

Despite talk of an imminent cut to the federal funds target rate, which now lies at a 40-year low of 1.75 percent, most experts said there was no justification for such a move now.

But many analysts were unwilling to rule it out as signs began to appear of a fraying around the US economic recovery.

"Although the abruptness of recent developments may argue against a hasty move by the Fed, upbeat assessments of the outlook are being reassessed continually," said Salomon Smith Barney economist Robert DiClemente.

"We do not expect the Fed to act next week but the fluid nature of the situation suggests that an early cut cannot be ruled out," he said.

"Events have persuaded us that a half-point move in the funds rate is a likely scenario over a one to two-month horizon as a catalyst for recovery in the markets and the economy."

US expectations have performed a U-turn from one month ago, when most analysts were tipping a rise in interest rates to unwind the dramatic easing over the past 18 months.

Since then, the relentless slide in the stock market and news of only sluggish economic growth -- 1.1 percent in the April-June quarter after a 5 percent expansion the first quarter -- have darkened the outlook.

A report on Friday that said productivity growth had slumped to 1.1 percent in the April-June quarter from a near 19-year record of 8.6 percent in the first quarter prompted manufacturers to cry out for action.

"This slow, jobless, inflation free recovery needs a boost from lower interest rates at the Fed meeting," said Thomas Duesterberg, president and chief executive of the Manufacturers Alliance.

Morgan Stanley Dean Witter economists Dick Berner and Dave Greenlaw were among the few actually tipping a cut in rates.

"We believe the Federal Reserve will ease monetary policy at its meeting next week by 50 basis points to insure that emerging economic weakness doesn't turn into a double-dip recession," they said in a report.

expectations

"If we are wrong and the Fed does not change rates next Tuesday, we expect officials to ease by the Sept. 24 FOMC [Federal Open Market Committee] meeting.

"An additional ease is possible if economic weakness spreads."

Most analysts, however, believed the economy already had sufficient stimulus to recover.

"I think rates are at a low enough level to spur recovery," said Sal Guatieri, Chicago-based economist at Bank of Montreal.

"But essentially any further rate cuts from these already low levels would imply greater insurance against the risk of a double-dip recession," the economist said.

Bank of Montreal expected the Federal Reserve to hold the key federal funds rate target steady.

"However, if things worsen, if stock prices fall further, employment begins to contract or CPI [consumer price index] moderated, the Fed probably would cut interest rates."