US RATE FUTURES-End week focused on 50 bps Fed cut

(Updates with late prices, comments)

By Ros Krasny

CHICAGO, Jan 25 (Reuters) - U.S. short-term interest rate futures on Friday ended a volatile week firmly focused on the prospect for another big Federal Reserve rate cut at next week's policy meeting.

Implied prospects for the Federal Open Market Committee to lower benchmark lending rates by 50 basis points next week FFG8, to 3 percent, fell to 36 percent early on Friday before roaring back to end the week at 70 percent.

"Optimism over fiscal stimulus gave way to realism about the state of the financial sector, kick-starting risk aversion trades from midday," said strategists at Action Economics, citing news of layoffs pending at investment bank Goldman Sachs (GS.N).

The FOMC lowered the fed funds rate by 75 basis points on Tuesday. The benchmark lending rate has been cut from 5.25 percent since mid-September. Fed policy-makers meet on Tuesday and Wednesday to mull their next step.

"Anything less (than 50 basis points) could pose harm to the confidence the market has in the Fed's ability to steer the economy," said Rudy Narvas, analyst at 4CAST Ltd.

Late-day strength in interest rate futures followed a slump in major U.S. equities indexes, which ended on a sour note after reaching the highest levels in over a week.

The Fed's emergency rate cut came under scrutiny on Thursday when it seemed that part of the global equities sell-off that appeared to trigger the Fed's move was tied to dumping of huge losing positions established by a rogue trader at French bank Societe Generale (SOGN.PA).

"The question of what the Fed will do at Wednesday's meeting has been considerably complicated by the SocGen scandal," said Chris Low, chief economist at FTN Financial.

"Nonetheless, we expect the Fed will cut rates again by 50 basis points on Wednesday, and on balance we think it is the right thing to do," Low said.

Still, analysts' views going into the policy meeting are unusually wide-ranging, perhaps mirroring the dissent thought to be brewing within the FOMC and creating the potential for a surprise outcome.

"We view the inter-meeting cut as pre-empting easing that would otherwise have occurred (later) this year," said Drew Matus, senior U.S. financial economist at Lehman Brothers, forecasting a quarter-point cut next week.