The suddenly active rate-cutting stance of the Federal Reserve will lessen, but not erase, chances of a recession next year, economists say.
The Fed is "tilting the odds in favor of a 'soft landing' in 1999 and against a recession," according to economist Ken Ackbarali of the Los Angeles Economic Development Corp.
"The odds are about 50% for a 'bumpy soft landing' over the coming year, with chances of recession at about 35%," said Nicholas S. Perna, chief economist at Fleet Financial Group.
A soft landing is a sharp slowing of the economy's rate of expansion. By contrast, a recession is defined as an actual decline in gross domestic product for two or more consecutive quarters.
Economists at Merrill Lynch & Co., who expect a soft landing aided by more Fed rate cuts, think GDP will grow by a modest 1.5% next year.
But many wonder whether financial markets and business conditions will respond to lower rates as they have in prior cycles in the past half century. Powerful economic forces not felt in recent times seem at work worldwide.
"Fed easing is no guarantee that the financial crisis is about to come to an orderly end, nor that any economic weakness won't be protracted," according to a new report by Michael Cloherty, Neal Soss, and other economists at Credit Suisse First Boston Corp.
"But because the Fed (policymakers) are signaling a willingness to act more aggressively, we should also give them the benefit of the doubt that they will-in the end-succeed, however low rates may have to fall," they said.
And Mr. Ackbarali said the Fed must keep cutting rates in order to maintain the tilt away from recession.
"To some extent," he said, "the financial markets have engaged the monetary authorities in a nerve-racking dare known as 'show me.' In this highly charged set of circumstances, the Fed can be successful only if it maintains credibility by continuing to move aggressively in the next several months."
Some take the more cautious view that the central bank at this point can only blunt a downturn.
"Aggressive Fed easing may soften the spreading worldwide recession, credit crunch, and deflation that otherwise threaten to engulf" the United States, said Philip Braverman, chief economist at DKB Securities (USA) Corp. in New York.
For this job, Fed rate cutting must go considerably further. The overnight federal funds rate, currently at 5%, probably must fall to 3.5% by the end of next year.
Meanwhile, he said, "growing concern over credit quality, liquidity, and safety will lead to more regulatory oversight, financial intermediary lending caution, and investor hesitancy."
Paul A. McCulley, economist at Warburg Dillon Read, said he expects another full percentage point of easing by the Fed, "with at least 25 basis points no later than" the next policy meeting, set for Nov. 17.
"We do not believe the Fed is now moving 'too little, too late,'" Mr. McCulley said in a report last week. "Rather, we believe the Fed will now err, very correctly, on the side of 'too much, too fast.'"