Just about everyone is predicting another rate cut, but will this rate cut be the last for a while?

CNN says “trading in futures markets predicts the Fed will cut its key fed funds overnight lending target by a quarter-point, to 2%, and hold the line there in coming months.”

The BBC says: “Fed ready to cut interest rate.” “Rate cut seen,” says Reuters.

“The interest-rate reduction could set in motion a series of diverse global events that will impact such seemingly unrelated areas as European inflation, global food prices, the US. dollar, American exports, and the already chilly relationship between the European Central Bank (ECB) and the government of France,” says Jennifer Yousfi in Money Morning.

Chuck Butler in The Daily Pfenning says thoughts of another rate cut by the Fed “has the dollar swinging the hammer again… And every currency has taken a hit from the hammer overnight… Except for Chinese renminbi…”

Bill Bonner has Paul Volcker in mind (and his warning that a painful adjustment is coming) but all he sees is “Ben Bernanke promising to drop dollars from helicopters, if necessary, in order to keep the economy bubbling along.

Bill says, “the Fed is unlikely to fall victim of a sudden attack of monetary integrity. The dollar is unlikely to rise very far against gold.”

Indeed, the interest-rate reduction could set in motion a series of diverse global events that will impact such seemingly unrelated areas as European inflation, global food prices, the U.S. dollar, American exports, and the already chilly relationship between the European Central Bank (ECB) and the government of France.

For any of this to happen, however, the Fed first has to act. Most observers believe the U.S. central bank’s policymaking Federal Open Market Committee (FOMC) will reduce the Federal Funds rate for the seventh time since mid-September, dropping the benchmark borrowing cost from 2.25% to 2.0%.

According to many experts, the Fed’s timing will be excellent. Economists have increasingly come to believe that the U.S. economy is probably in a recession already, although most await more-certain evidence before actually making the pronouncement.

Some of that evidence could come out today. U.S. stocks traded in a narrow range yesterday (Tuesday) as the market awaited two important announcements: The advance estimate of U.S. Gross Domestic Product (GDP) and the central bank’s rate-reduction decision – both due out today.

“Another large batch of companies has reported quarterly earnings results, but overall, they have failed to move the needle that much as the market is in a wait-and-see mode ahead of the GDP data and the FOMC decision on Wednesday,” Patrick O’Hare at Briefing.com Inc. told the AFP news service.

There are some strong dissenters.

“There is no reason why the Fed should be cutting rates right now,” Richard Yamarone, director of economic research at Argus Research Corp., told MarketWatch.com.

What Tales GDP Doth Tell

Although GDP is a lagging indicator, analysts anxiously await the report since it will demonstrate whether the U.S. economy is as weak as many believe. According to a Reuters‘ poll, first quarter GDP is expected to clock in at a sluggish 0.2%, down from a 0.6% growth rate in the fourth quarter. Reuters developed the consensus estimate by averaging 89 predictions, which ranged from contraction of 0.8% to growth of 1.5%.

Most analysts, including those at UBS AG (UBS) and Lehman Brothers Holdings Inc. (LEH), felt March’s surprisingly strong durable goods orders and an increase in inventories would tip the balance in favor of slim growth in the first quarter. However, analysts did note that inventory increase could signal weakness ahead, especially if not supported by the accompanying increase in sales needed to create the “sell through” that would keep additional inventories from piling up.

“A $5 billion accumulation of [inventories] would add almost a full percentage point to GDP growth and, in our forecast, constitutes the difference between a positive and a negative result,” RBS Greenwich Capital said in a note to clients.

A positive GDP estimate, however slight, could mean the U.S. economy is poised to skirt a true recession. The textbook definition of a recession is two consecutive quarters of negative GDP growth.

But the weak GDP estimate, which will be announced early this morning, could prove the justification the FOMC needs to recommend another rate reduction this afternoon.

CME Group Inc.’s (CME) Chicago Board of Trade futures are pricing in an 82% chance that the FOMC will recommend the U.S. Federal Reserve make a quarter point cut, bringing its key interest rate down to 2.0%. When the Ben S. Bernanke-led central bank started its rate-cutting campaign last year, the Fed Funds rate stood at 5.75%.

And if policymakers do order the rate-reduction, most analysts believe it will be the last one for awhile; those same CBOT futures indicate a 71% chance that the Fed will hold the line on interest rates when the committee meets again in June.

“The direction of Fed policy hangs in the balance, and there are people like me that hope the central bank quits sooner rather then later,” Jack A. Ablin, chief investment officer at Harris Private Bank, told The New York Times.

But here’s where the global wild cards come into play.

When Everything’s Wild

With its ambitious rate-cutting strategy, the Fed has stoked domestic inflationary pressures and helped accelerate the decline of an already-sinking dollar.

Officially, the U.S. inflation rate stands at about 4%, though many experts – including Money Morning Contributing Editor Martin Hutchinson – believe the actual U.S. inflation rate is much higher. In fact, anyone who studies the sharp increases in energy, food prices, commodities, healthcare, and a university-level education may find it tough to argue that prices aren’t headed higher.

Even with a bit of a rebound, of late, the dollar is down more than 7.3% against the euro in the past six months, 12.35% in the past 12 months and nearly 28% in the last 54 months. The greenback is down substantially against other key currencies, too, and that’s helped fuel a massive run-up in the cost of energy and food-related imports – all highly inflationary for U.S. consumers.

At the same time, however, the cheap dollar has made U.S. exports very competitive abroad. Indeed, for foreign buyers of such big-ticket products as Boeing Co. (BA) jetliners, the plunging dollar has served as a global blue-light special. Boeing’s bureaucratic arch-rival, Airbus SAS, hasn’t been able to compete, and a week ago was actually forced to raise prices on two of its commercial jets – citing rising steel prices and a falling dollar as the two key causes.

On Sunday, French Economy Minister Christine Lagarde said the gap between the U.S. and Eurozone interest rates was way too large, and called for a change in interest-rate policies – either by the Fed or the European Central Bank (ECB).

The U.S. Fed has been slashing rates to jump-start economic growth while also keeping a horrid housing market from putting the entire economy to sleep. The ECB, by contrast, has kept rates high to combat inflation – even though that strategy is pushing Europe into an undesirable slowdown.

“We are in a delicate situation where we have, on the one hand, an American Federal (Reserve) which has a policy of very low rates and a European Central Bank which has maintained high interest rates,” Lagarde told LCI Television and RTL Radio, the global wire service Reuters reported. “The differential in interest between the two, it seems to me, is a little too big at the moment.”

Paris has long been a vocal critic of what French President Nicolas Sarkozy has termed the ECB’s overly narrow focus on fighting inflation. But Sarkozy and Co. have been criticized by both Germany and the ECB for attempting to meddle in the business of a supposedly “independent” central bank.

The move by the BOE’s Monetary Policy Committee (MPC) was the third quarter point rate reduction since December as the United Kingdom faces many of the same problems currently plaguing the U.S. economy including a housing slump.

U.K. inflation is currently at 2.5%, above the BOE’s desired 2% target rate, but the central bank feels the current risks to economic growth outweigh inflationary concerns.

“Credit conditions have tightened and the availability of credit appears to be worsening,” the MPC said in its policy statement.

The statement did not foreshadow another rate cut when the MPC next meets in May.

“With today’s move arguably only providing a partial offset to the recent tightening of credit conditions, RBC Capital Markets suspects that the pressure is on for a follow up cut in somewhat short order and, indeed, sees some significant risk of a further 25-basis-point reduction in May, ” Richard McGuire, economist and fixed-income strategist at RBC Capital Markets, told MarketWatch.

Meanwhile, the ECB, led by President Jean- Claude Trichet elected to maintain its current interest rate due to inflation pressures.

“We are experiencing a rather protracted period of temporarily high annual rates of inflation,” Bloomberg News reported Trichet said at a press conference in Frankfurt yesterday after the ECB vote. While financial-market tension may have “a broader than currently expected impact on the real economy,” ensuring price stability is “very serious for us,” he said.

European inflation is currently at a 16-year high. And while Europe’s growth is expected to slow, the IMF forecast it would expand at a 1.2% rate, twice the 0.6% that is expected for the United States.

The U.S. Federal Reserve has cut its rate by 3% to 2.25% since September.

“The world is caught between ice and fire – slower growth and inflation,” Dominique Strauss-Kahn, managing director of the IMF, said yesterday. “Inflation is back.”