As expected, the U.S. Federal Reserve cut interest rates for the tenth time this year. The move by the Fed takes the overnight federal funds rate down a full 50 basis points to 2%, its lowest level in forty years. Economists say further cuts are likely..

BMO Nesbitt Burns says that the aggressive easing by the Fed was no surprise, and that it was well warranted by the dismal employment and manufacturing reports for October. Looking at the accompanying policy statement, BMO says, “the Fed will ease again, and possibly again. We are now forecasting a rock-bottom 1.5% fed funds rate by February, with quarter-point rate cuts at both the December 11th and January 30th FOMC meetings.”

CIBC World Markets says that it expects a 25 bps trimming in December, and that a move to 1.5% could be in the cards for early 2002 if the economy hasn’t shown the turn that we expect to see by then. “The leadership in driving growth, however, is likely to shift towards fiscal policy. Rate cuts have done a good job propping up interest sensitive demand for autos and housing, which would typically have been much weaker at this stage of the cycle. But Washington has recognized that a direct boost to spending power will, at this point, carry more weight.”

BMO declares that all this aggressive easing in monetary policy will eventually do its job. “We remain confident that, barring another major terrorist disruption, the global economy will be headed for rebound by the spring of next year. The stock market will anticipate this, leading the economy by four-to-six months. Further downward pressure on interest rates across the yield curve is likely as inflation continues to dissipate.”

BMO also suggests that the Bank of Canada will now cut overnight rates another 50 bps on November 27, its next policy decision date, and that an additional easing on January 15 is also likely. The European Central Bank, the Bank of England and the Reserve Bank of Australia are also likely to cut interest rates this week, it says.