Updated from 2:59 p.m. EST, Jan. 30, 2001

The question now is not necessarily what happens today, but what happens next.

It's expected that the

Federal Reserve will announce today that it has slashed the

fed funds rate, the key short-term lending rate, to 5.5% from 6%, which would mean that the

Federal Open Market Committee would have cut rates by a full percentage point in a

month to stave off a recession.

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The markets -- judging by the

fed funds futures contract and the yield on two-year Treasury notes -- are fully anticipating such a move. Fed officials have made no secret of their concern about the economy -- Chairman

Alan Greenspan told the

Senate Budget Committee

last

Thursday that the economy was currently close to zero growth.

With today's outcome all but assured, market watchers are curious to see what kind of stance the Fed takes after completing its recent round of very aggressive easing.

Many economists expect at least two more quarter-point rate cuts, but they believe the Fed, following the expected action, will revert to a "wait-and-see" mode to determine whether the economy continues to show the nascent signs of a recovery, or if it slips further.

Financial Conditions Improve

So far, there've been some encouraging signs, largely with respect to financial conditions, and some tentative signs of rebound in consumer demand. While Fed rate cuts won't necessarily affect certain sectors of the economy, such as manufacturing, for several months, financial conditions tend to respond more quickly to the Fed's efforts to loosen credit.

"There's evidence of an increase in real estate loans, mortgage refinancing, and commercial and industrial loans have gone up considerably," said Tony Crescenzi, chief bond market strategist at

Miller Tabak

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.

Increasing bank loan activity, mortgage refinancing and corporate debt sales are an indication that financing is easier to attract. That's important, because companies are using the money for capital spending, improvements and other reasons, which can help economic growth. The increase in mortgage refinancing represents a savings for consumers; that extra money is also likely to be funneled into more spending or into the stock market.

These improvements in the economy, should they persist, could help move the economy toward a brighter path, where growth improves from the "close to zero" estimated by Greenspan. Should that occur, the Fed's job will be to continue to help the economy rebound from its current fragile state. However, most economists don't believe the Fed will find many more rate cuts necessary.

"With 100

basis points in a month, maybe we'll get another 50 on the top of that. My hunch is that the economy is kind of reaching its low point here in the first quarter, and should start to improve a bit," said Josh Feinman, chief economist at

Deutsche Asset Management Americas

.

Recovery Not in the Bag Yet

Some measures of the economy, though, are showing significant weakness, and there's been a notable drop in consumer confidence of late. The

Consumer Confidence Index, the

Conference Board's

measure of consumer confidence, came in weaker than expected in January, at 114.4 vs. consensus expectation of 125. That figure has dropped sharply in the last two months, as have other measures, including the

University of Michigan's index.

The drop is significant, because it expresses consumers' estimation of their own job security, as well as their desire to spend money or invest in the stock market. Some economists believe the weakness displayed in certain areas of the economy, such as production and business investment, could continue to erode confidence. If demand doesn't rebound, the labor market will soften considerably. The threat of

layoffs could accentuate current concerns that citizens have, and what results is a cycle that diminishes consumer desire to spend money. It's a worry Greenspan himself expressed last week.

"The crucial issue ... is whether

the marked decline

in production already under way breaches consumer confidence because there is something different about a recession from other times in the economy," he said. "It is not a continuum from slow growth into negative growth. Something happens."

It could mean the Federal Reserve has significant work to do, and one or two rate cuts wouldn't do the trick.

How this differs from the beginning of January, when the Fed reacted to what it saw as a dangerous situation, is that either scenario is hard to nail down. The recent positive signals displayed in financial markets can be countered with negative ones in other facets of the economy. Some economists note that an economy heading into a recession tends to give mixed signals, which is what we're currently seeing. But perhaps the emerging improvement in credit spreads and financing activity is a harbinger of recovery.

Either way, the Fed seems to have made up its mind. It appears concerned enough not to dispel the notion that the central bank is going to cut rates by 50 basis points today. After that, the Fed will be watching along with the rest of the market.