Clearbrook's Sowanick: Fed cut not guaranteed

NEW YORK (Reuters) - The rally in U.S. equity prices since late November means chances of the Federal Reserve cutting interest rates on Tuesday have diminished, Tom Sowanick, a top officer at Clearbrook Financial LLC said on Monday.

"I think there's only a 50 percent probability the Fed moves tomorrow," Sowanick, chief investment officer at the Princeton, New Jersey, firm said at the Reuters Investment Outlook 2008 Summit in New York.

Sowanick said he interpreted recent remarks by top Fed officials to mean the central bank had elevated the importance of the equities market in its decision-making during the current period of "crisis management" since the major credit crunch that hit in August.

Since reaching a three-month low of 1,406 points on November 26 the S&P 500 index .SPX has risen about 7.7 percent.

Sowanick's view on Tuesday's final Federal Open Market Committee meeting for 2007 runs contrary to the consensus shown in short-term interest rate derivatives.

Partly influenced by recent Fed rhetoric, rate futures and options favor a 25 basis point cut to the federal funds rate, to 4.25 percent, with a smaller chance the FOMC could slash rates by 50 basis points.

If the Fed does leave rates unchanged on Tuesday, and says that risks between growth and inflation are still balanced and it has opted for a wait-and-see strategy, it would be "good for stocks, not nice for bonds," Sowanick said.

By contrast, a 50 basis point rate cut would likely hurt equities by suggesting the Fed expects even bigger, as yet unforeseen fallout from the subprime mortgage crisis, he said.

Sowanick said the Fed would likely be raising rates again by the second half of 2008.

"I think the mortgage mess is contained," he said.

(Reporting by Ros Krasny; Editing by Leslie Adler)