What the Fed is considering at its meeting

By Mark Felsenthal

WASHINGTON (Reuters) - The Federal Reserve looks set to deliver a small interest rate cut on Wednesday to help an economy moving sideways at best and could signal the move is the last in a cycle as officials eye inflation warily.

The Fed has already cut interest rates to 2.25 percent from 5.25 percent in six steps since mid-September in an effort to keep U.S. economic activity going in spite of a credit crunch and a deep housing downturn.

Food, fuel and raw material prices are rising, boosting inflationary pressures, a Fed report said recently.

"This meeting's accompanying statement poses a special challenge for the committee -- justify easing another quarter point to avoid a deeper recession, and simultaneously acknowledging the risk of commodity inflationary pressures," RBS Greenwich Capital analysts David Ader and Ian Lyngen said in a research note.

Interest-rate futures prices imply about an 80 percent probability of a further quarter-point reduction and about a one-in-five chance of no move at all when the Fed wraps up a two-day meeting on Wednesday.

The government reports on first-quarter U.S. gross domestic product on Wednesday. Economists polled by Reuters expect the economy expanded at a sickly 0.2 percent annual rate, which would be the weakest since the closing months of 2002.

In addition to cuts in benchmark rates, the U.S. central bank has unleashed a series of emergency measures, sometimes in coordination with other central banks around the world, to keep banks and major financial firms lending and borrowing. In a dramatic intervention last month, it stepped in to prevent the failure of wounded investment bank Bear Stearns .

With some signs financial markets are stabilizing, Fed officials expect the combined effects of rate cuts and a $152 billion government stimulus package to revive the economy.