WASHINGTON -- The bond market is primed for another round of cuts in short-term interest rates by the Federal Reserve despite the dollar jitters in foreign exchange markets, analysts said yesterday.

Expectations are widespread that the Fed will move Friday to slash the discount rate to 2.5% from 3% and the federal funds rate by at least 25 basis points to 2.75%. That is assuming the Labor Department reports nonfarm jobs fell in September, something many economists predict.

"Most people are assuming we will get another easing" in Fred monetary policy, said Alan Lerner, chief economist for Bankers Trust Co.

Money markets and short-term notes are already priced in large measure for a reduction in the federal funds rate to 2.75%. The Fed could also opt for a bolder strategy and cut the funds rate to 2.05%, but that will depend on what happens with key features such as hours worked and earnings, analysts said.

The dollar has dropped more than 6% against the German mark since last week and has hit all-time lows against the Japanese yen. Yesterday, the foreign exchange market appeared calmer as the dollar was up slightly at midday, trading at 1.4174 on the mark and around 120 on the yen.

Analysts and traders attributed much of the dollar's weakness to rising expectations that additional U.S. rate cuts are in store given the recent stream of economic indicators showing the economy is only inching ahead.

On Tuesday, the Commerce Department reported that the index of leading economic indicators for August fell 0.2%, the second decline in the last three months. Separately, the Conference Board said its consumer confidence index fell for the third month in row.

The dollar was also rattled Tuesday on reports that German monetary officials are not inclined to lower rates any time soon. Traders took a statement by a Bundesbank official to mean that the wide differential between U.S. and German rates will continue to make investment in mark-denominated securities comparatively more attractive.

Still, "inflation is not a problem," and should not be a barrier to further Fed easing, said Mr. Lerner. Inflation fears about a weak dollar adding to the cost of imports in the 1980s proved to be overblown, and in any case it is questionable how much merchants can raise prices given the softness in consumer demand, said Mr. Lerner.

Bruce Steinberg, manager of macroeconomic analysis for Merrill Lynch, agreed that the dollar is not a high priority for Fed policymakers at present. A cut in rates, he said, "is widely anticipated" in the bond market.

Mr. Steinberg is looking for a drop of 125,000 in nonfarm payroll jobs in September, including the loss of jobs by teenagers hired under the federal government's summer funding program. The civilian unemployment report could rise to 7.8% from 7.6%, he said.

Not all analysts think the Fed still has a free hand on monetary policy, however. "The Fed weighs a number of things, and if they put a high enough priority on international considerations, they won't move," said John Godfrey, chief economist for Barnett Banks in Jacksonville, Fla. "Given the changes that they've seen with the dollar, it's quite likely they won't move."

Moreover, there was talk yesterday that Fed officials are split on whether to ease policy again. According to a report by the consulting firm of Johnson Smick International Inc., Fed Chairman Alan Greenspan was working with a 4-to-3 split on the board in favor of another round of rate cuts and wanted to achieve more consensus before acting.

Accordingly, there was speculation the Fed may wait until the meeting of the Federal Open Market Committee on Oct. 6 before deciding what to do. Johnson Smick circulates its report privately to paying subscribers and declined to comment.

Joseph Liro, senior vice president for S.G. Warburg & Co., said he expects the Fed to hold off on lowering rates to retain some market clout for a period of economic weakness that could stretch into next year.

"The economy is going to have to hold a gun to their head to force them to go," he said. "They have easing to do, but they're going to be real careful about where they pick their spots and what they do."

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