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Stocks Finish Flat Ahead of Fed Rate Meeting

The big question: Will the Fed buy one last round of drinks for the house on Tuesday -- then close up the Rate Cut Saloon?

Stocks drifted for most of Monday's session until a late burst of short covering before the closing bell. Investors made a dash to cover short positions just before the closing bell, but for most of Monday's session, stocks drited in anticipation of Tuesday's Federal Reserve meeting, at which Chairman Alan Greenspan and other policymakers are expected to cut interest rates by 50 basis points.

The stock market was treading water on light volume for most of the day ahead of the upcoming Federal Open Market Committee (FOMC) meeting.

Strong data on consumer sentiment and retail sales issued Friday are casting doubt among investors, some of who are already worried that the next rate cut will mark the end of the Fed's current easing cycle. Though most have already factored in a half of a percentage point cut on Tuesday, which would bring the Fed funds target rate to 4%, there has been a shift in expectation. Many are bracing for a smaller 25 basis point reduction, which is would likely spark a selloff, analysts say.

But looking beyond Tuesday, whether the Fed lowers by 50 basis points or 25, Peter Cardillo, chief strategeist at Westfalia Investments, says the key is in the Fed's statement. "If the Fed indicates that this is the last cut, we'll see market probably concentrate on a rebound."

"This is a very aggressive Fed that wants to turn the economy around," says Tim Ghriskey, senior portfolio manager at Dreyfus Corp. "We've seen some data that don't point to an acceleration of a decline. But you always see those." He expects the Fed to lower interest rates by 50 basis points, despite recent signs of a rebound. Ghriskey expects the market to respond positively if the Fed delivers the 50 basis point cut, but notest that "so much depends on the spin the Fed puts on it."

On the economic data front, industrial production in April was revised lower to a 0.1% decline while capacity utilization fell to 78.5% after a 78.9% rate in March. This is the seventh straight month of declines in production. However, another report showed a reduction in U.S. business inventories, which is a positive sign for the economy.

Among Monday's market movers, SunTrust Banks Inc. (STI ) launched an unsolicited $14.7 billion bid for Wachovia Corp. (WB ), beating an earlier offer from First Union Corp. (FTU ). SunTrust says it wants to strengthen its Southeastern presence by expanding in North Carolina.

The Dow Jones Industrial Average added 56.02 points, or 0.52%, to 10,877.33. The Nasdaq Composite index lost 25.52 points, or 1.21%, to 2,081.91. Meanwhile, the broader S&P 500 added 3.25 points, or 0.26%, to 1,248.92.

Treasury Market

U.S. Treasuries finished higher following a sharp selloff last week.

The latest data on business inventories showed a drop in line with analysts' expectations. A decline of 0.3% in March follows a 0.4% decline in inventories in February. A reduction of inventories is expected to help the economy restart production.

Monday's economic reports will, of course, factor into the Federal Reserve's rate-setting committee's decision on interest rate cuts, but investors are not expected to have strong reaction to today's data.

World Markets

European markets ended lower. London's Financial Times-Stock Exchange 100 index finished off 206.30 points, or 3.50%, to 5,690.50, as concerns that the U.S. Fed is at the end of its easing cycle prompted profit-taking. Germany's DAX Index lost 76.34 points, or 1.24%, to 6,064.68. In Paris, the CAC 40 ended down 79.53 points, or 1.43% to 5,487.72.

Asian markets ended lower. Japan's Nikkei 225 index lost 170.90 points, or 1.22%, to 13,873.02. In Hong Kong, the Hang Seng index lost 377.44 points, or 2.77%, to 13,259.17.

By Amy Tsao in New York

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