Rate uncertainty hangs over U.S. stocks

By Jennifer Coogan

NEW YORK (Reuters) - The stock market will likely start the week on a hesitant note with Wall Street facing the first Federal Reserve interest-rate decision in many months not knowing that a cut is likely guaranteed.

Sparks could fly, however, if Yahoo Inc responds to Microsoft Corp's takeover offer this weekend. The world's largest software company set a Saturday deadline for the two sides to reach a deal and said it would consider its options of going hostile or withdrawing its offer.

A disappointing earnings report from Microsoft capped gains by all three major U.S. stock indexes last week.

For the past week, the Dow Jones industrial average ended up 0.3 percent, the Standard & Poor's 500 Index gained 0.5 percent and the Nasdaq Composite Index rose 0.8 percent.

Despite Microsoft's miss, the past two weeks have seen a steady stream of encouraging earnings reports. This was especially true in the financial sector, which gave hope to Wall Street that the worst of the credit crisis is near and suggested that further rate cuts may not be needed.

Expectations for a half-point cut were erased on April 18, when stocks staged a sharp rally after strong earnings from Google and Caterpillar pointed to resilience in the face of a slowdown.

While the majority of bets are for a 25 basis-point cut, there is still a 1-in-4 chance of no rate cut, based on fed funds futures. Not since August has there been any question whether or not the Fed would cut rates.

The Fed will announce its rate decision on Wednesday at 2:15 p.m. EDT (1815 GMT). Earlier that day, the Commerce Department releases first-quarter gross domestic product data.