Chances rise for another 50 point Fed cut

By Ros Krasny

CHICAGO (Reuters) - U.S. short-term interest rate futures rallied on Wednesday after the Federal Reserve lowered benchmark lending rates by 50 basis points and promised to "act in a timely manner" to address risks to the economy.

Futures markets fully price another 25 basis point rate cut from the Fed at its March 18 meeting, and as much as a 52-percent chance of another 50 basis point reduction.

Before the end of the Federal Open Market Committee meeting futures had leaned toward a 25 basis point cut in March but showed no chance of another 50 basis point cut.

Wednesday's move took the benchmark fed funds rate to 3 percent from 5.25 percent when the easing cycle started in mid-September, the most rapid reduction since 1989.

In comments accompanying the rate cut, the Fed noted that financial markets remain under considerable stress.

"This is consistent with (Chairman Ben) Bernanke's concern about the feedback loop from the financial markets to the real economy," said Marc Chandler, strategist at Brown Brothers Harriman in New York.

Wednesday's FOMC vote followed the release of fourth-quarter GDP data showing growth at the end of 2007 was weaker than expected.

Given ongoing problems in the credit and housing markets, many forecasters expect growth to stay soft at least during the first half of 2008.

Futures see the fed funds rate by mid-year dropping to 2.25 percent.

"If we go into a full-fledged recession, which seems more likely than not, the fed funds rate will go down to 2.0 percent by summer," said Bill Hampel, chief economist at the National Credit Union Association in Washington.

Still, the FOMC statement dropped the word "appreciable" from its assessment of downside risks to the economy, suggesting to some that the rate cutting cycle could end sooner rather than later.

(Reporting by Ros Krasny)