"I believe that the U.S. Federal Reserve will lower the key interest rate from five per cent to 4.5 per cent by the end of the year and then to four per cent in the early months of 1999, and if necessary, lower it even further," Steinberg said.

The Federal Reserve cut its federal funds rate to 5.0 percent from 5.25 per cent earlier this month.

Official U.S. interest rates are now at their lowest level in four years amid efforts to keep global turmoil from hurting the U.S. economy and to ease tightening credit conditions.

Merrill Lynch estimated that the U.S. economy would grow only by 1.6 per cent in 1999 even if the Fed did cut interest rates, he said.

He said the possibility of deflation in the U.S. and of a "credit crunch" amid instability in financialmarkets would continue to be a concern and threaten world growth.

"What could be really critical is the negative combination of shaken investor confidence and a noticeably lower willingness by banks to take risks," he said.