By James Langton

(April 18 – 16:30 ET) – On the heels of today’s surprise rate cut economists are trying to decipher the meaning of the Fed’s sudden action.

Markets are certainly applauding the 50 basis point inter-meeting rate cut in the U.S. But for some analysts, it raises the question of whether the U.S. economy is worse than the market suspects.

Although traders were talking up an inter-meeting cut last week, it seemed just that, talk. Today’s cut was not priced into the market, hence the strong reaction. The U.S. Federal Reserve Board had done nothing to signal its intention, also an unusual move. “The Fed’s aggressive action suggests they will cut rates again on May 15. Otherwise, they would likely have waited until the scheduled FOMC meeting. We believe rates will fall below 4% soon,” says BMO Nesbitt Burns Inc.

The bulls at Merrill Lynch also see another rate cut in May. They expect 4% rates by June.

BMO notes that the Fed attributes today’s move to capital spending weakness, and it suggests the Fed is right in that call. As to whether this move suggests a truly dire economy in the cards, BMO is stumped. “Markets will now wonder, does the Fed know something we don’t know? It’s about half way between meetings is the extent of our help on the issue of why now?”

Merrill’s chief U.S. investment strategist Christine Callies says, “We would point out that investors should not be too quick to assume that the rally cannot last. We believe this is very powerful stimulus and we think the market has already set itself up to respond to improving data from the economy at some point this year.” It sees the stock market rally coming from value investors.