U.S. rate cut seen likely

SYDNEY, Australia (CNN) -- A U.S. rate cut of up to half a percentage point is on the cards, according to analysts who see it as one way to boost shattered business and consumer confidence in the U.S.

Other analysts say that liquidity will be the key issue for the U.S. Federal Reserve, more so than the cost of money.

A rate cut could come in a matter of days, even though the Fed's open market committee is not due to meet again until October 2.

It will likely depend on how the U.S. stock market reacts when it opens, which would be Friday at the earliest.

'Business as usual' message

Commonwealth Securities chief economist Craig James said how well the U.S. told the "business as usual" message would be a key factor.

In Asia Thursday, equity markets generally stayed just above the levels they fell to on Wednesday.

In Tokyo, the Nikkei finished at 9613.09, a gain of just 2.99 points on the previous day's close when it had slumped to levels not seen since 1984.

Traders say markets are already factoring in a U.S. rate cut of up to half a percentage point.

Fed chairman Alan Greenspan, who returned to Washington from Europe on Wednesday, could move quickly if he thought it necessary.

Last cut in August

The Fed last cut rates on August 21, lopping a quarter of a percentage point off its federal funds rate to 3.5 percent and the discount rate to 3 percent.

It said then than weakness in business profits and capital spending, plus slowing growth outside the U.S., was weighing on the U.S. economy.

Analysts define this week's terrorist attacks in New York and Washington as the pivotal event that could tip the U.S. into recession.

Morgan Stanley chief economist and global analyst Stephen Roach said in a research note released Thursday that the attacks represented a "severe negative shock to U.S. consumer confidence" that could well be the tipping point to the recession of 2001.

Roach said he expected the Fed to send a clear signal.

Fiscal policy 'should turn more expansionary'

"In a period of crisis, it takes its role as a liquidity provider most seriously. Fiscal policy should turn more expansionary, as spending is stepped up on defense and on internal security," he noted.

The world's three key central banks -- the U.S. Fed, the Bank of Japan and the European Central Bank -- acted quickly to keep markets liquid after the attacks, pumping $120 billion into the banking system on Wednesday, according to Reuters.

The ECB has a scheduled policy meeting later on Thursday, though analysts assume a cut is unlikely given that bank President Wim Duisenberg said on Wednesday it might prove counterproductive to rush into hasty moves.

CommSec chief economist Craig James said confidence was the economic focus. Much would turn on the success of the U.S. government in delivering the message that it is "business as usual" in the U.S.

"The determination on the part of U.S. business and consumers to rebound from this shock will be the key to how severely the U.S. economy will be affected in a longer-term sense," he said.