OECD urges U.S. Fed to cut rates by further 25 bp if slowdown continues

PARIS (AFX) - The U.S. Federal Reserve should cut interest rates further if the economic slowdown continues, the Organisation for Economic Cooperation and Development said.	    In its preliminary economic outlook, the OECD said the long-anticipated downturn which began in the second half of 2000 had been unexpectedly sharp, driven by an abrupt change in sentiment in financial markets.	    The full magnitude of the slowdown might be seen only in the first half of 2001 as inventories adjusted to slower consumption and as investment fell, it said.	    "But with an easier stance of economic policy, a recovery seems likely to take hold in the second half of the year," it said.	    "Monetary policy is now supporting demand, but with possible adverse effects on consumption from the large fall in share prices the recovery could be delayed, justifying a further modest cut in interest rates," it said.	    The federal reserve open market committee has cut interest rates by 200 basis points this year, most recently on April 18. The rate-setting body next meets on May 15.	    The OECD said that care must be taken to guard against excessive easing while the labour market was still taut.	    "However, given the continuing downward momentum in the economy, the OECD projection is based on the assumption that an additional cut in the federal funds rate of 25 basis points will be necessary.	    "As the economy recovers, mometary stimulus will gradually need to be withdrawn."	    The OECD said the rate cuts to date might help contain adverse wealth effects in the near term and should stimulate demand, especially in the auto industry, one of the main sources of weakness.	    Lower interest rates were less likely however to have much effect on the demand weakness in the electronics sector, another major driving force of the downturn, it said.	    On the Bush administration's $1.6 trln tax-reduction proposal currently before the congress, the OECD said the overall fiscal stance would be "somewhat restrictive" this year before turning expansionary in 2002.	    The OECD said the tax plan would not address some important distortions and anomalies in the fiscal system nor reduce its complexity.

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