Tuesday cut won't be Fed's last: analysts

By Ros Krasny

NEW YORK (Reuters) - The Federal Reserve is likely to make additional interest rate cuts in early 2008 as the U.S. economy crawls along at a subpar rate of growth and faces a heightened risk of outright recession.

Speakers on the first day of the Reuters Investment Outlook 2008 Summit were almost unanimous in expecting the federal funds rate to be cut by one-quarter point, to 4.25 percent, at Tuesday's Federal Open Market Committee meeting.

Results of the Fed's final scheduled policy deliberations for 2007 are expected around 2:15 ET.

The U.S. central bank has lowered rates by 75 basis points since mid-September, citing increased risks to economic growth posed by fallout from the mortgage lending crisis that erupted in mid-August.

Bob Doll, head of global equities at BlackRock Inc., looked for the Fed to continue a methodical program of cuts until the fed funds rate hits 3.5 percent, and added that if the United States drifts into recession the end-point for easing could be 3 percent.

"The center of the pebble in the pond was subprime leveraged mortgages, but the ripple effect has touched almost everything now," Doll said on Monday.

The chances of recession are now about one in three, up from one in four coming into this year, given the credit problems and the long-in-the-tooth U.S. expansion, he said.

Also expecting a three-handle on fed funds in 2008 was Mary Miller, director of fixed income at T. Rowe Price Inc. in Baltimore.

"I think cuts will go on beyond January. They will be front-loaded in 2008. We expect 3.5 percent to 3.75 percent in 2008," said Miller.

The mutual fund firm's official view on a possible 2008 recession is about a 25 percent chance, but "bond people are gloomier than stocks people," Miller said. "I probably see it as a bit higher."

Deborah Cunningham, chief investment officer for taxable money markets at Federated Investors Inc. in Pittsburgh, said the Fed might be able to hold the line on rates after likely lowering rates to 4 percent in January.

Federated is looking for a slowdown in U.S. economic growth in 2008 to the 1.5 percent to 2.0 percent range, "but certainly not a recession," said Cunningham.

After January policy-makers should be able to move away from their current crisis-management mode and back focusing on economic fundamentals, she said.

LOOK AT WHAT THEY SAY

The analysts said they are focused on the statement that will accompany Tuesday's FOMC decision on interest rates, after what many thought was a verbal misstep in the October 30-31 meeting's accompanying statement.  Continued...