Economists see today’s U.S. rate action spilling over into Canada come January.

The U.S. Federal Reserve Board cut fed funds target rate another 25 basis points to 1.75% today. It also kept its tightening bias in place, suggesting further cuts are possible.

The Fed does not meet again until the end of January however. CIBC World Markets notes that for the first time in many months, the Fed saw signals, albeit “tentative” and “preliminary,” that the weakness in demand was beginning to abate.

CIBC says the end of the easing cycle typically coincides with a peaking in the unemployment rate. “Recent jobless claims figures haven’t yet given that signal, but we expect a significant softening in job losses in early 2002. If that fails to materialize, both our call for a bottom in the funds rate at 1.75%, and the Fed’s current thinking that the rate cuts might be over soon, will be off the mark. For now, we’ll stay with our view that the overnight rate has hit bottom at 1.75%. But the yield curve prices in too quick, and too dramatic, a return to rate hikes over 2002-2003, a view that will be challenged by soft inflation and a return to only sluggish growth over the first half of next year.”

Bank of Montreal says that given persistent economic weakness, it expects growth to contract at an annual rate of 2% in the fourth quarter after shrinking 1.1% in the third quarter. It says, “At the moment we believe today’s action represents the trough for rates, provided that upcoming data point to a recovery in the New Year.” BMO Nesbitt Burns allows that there could be one more cut at the end of January.

The Bank of Canada meets in mid-January. BMO says, “The possibility of further ease by the Fed will, at the margin, encourage the Bank of Canada to ease further. We expect a 25 basis points reduction in Canadian overnight rates at the January 15 fixed announcement date.”

BMO Nesbitt Burns is a little more aggressive suggesting that the Bank of Canada will follow the Fed on their January 15 policy statement date and cut rates 25 to 50 basis points. “The Bank, as well, is very near the end of the easing cycle. While bond yields in both Canada and the U.S. might retrace some of their recent rise in coming months as inflation remains low and nominal GDP growth is muted, we are close to the end of what has been a thirty-year secular decline in long-term interest rates.”

BMO Nesbitt Burns observes that a record volume of cash is now parked in money market mutual funds, bank deposits and other short-term assets thanks to aggressive monetary easing. “This will likely find its way into the spending stream and into the stock market in coming quarters. Over the near-term, however, the high level of price-earnings multiples coupled with the recent rise in bond yields, suggests the stock market might have gotten ahead of itself.”