By Caren Bohan

WASHINGTON (Reuters) - Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) will get the chance on Wednesday to set the record straight about a hefty U.S. interest-rate cut, a move intended to reassure which analysts say fell short of its aim.

The Fed on Nov. 6 slashed overnight rates by a half-percentage point -- a reduction double the size of what most private economists expected.

Stock prices rose the day of the cut but have since slid, with losses fueled in part by concerns the forceful rate move may indicate underlying economic weakness.

Equity markets, which tumbled further on Monday, have also been hit hard by worries about a possible U.S. war with Iraq, a concern the Fed gave a nod to in its post-meeting statement as "geopolitical risks."

A more uncertain economic climate has pushed bond prices higher.

"Greenspan is going to have to fill in a lot of gaps," said economist Anthony Chan of Banc One Investment Advisors in Columbus, Ohio.

The Fed chairman is to appear before Congress's Joint Economic Committee at 10 a.m. EST (1500 GMT) to discuss the U.S. economic outlook.

Last week's cut in a trendsetting interest rate, which sent it to a new 40-year low of 1.25 percent, could give the economy a shot in the arm by making it easier to buy homes, cars and other costly items. It would also provide plentiful credit that might help revive moribund business investment.

Yet some economists fear the surprisingly aggressive move might signal that policymakers are gloomier about the economy's prospects than they have indicated in public so far.

"This was an extraordinary move and the real justification for it has yet to be known," said Roger Kubarych, senior economic adviser for the Americas with Hypo-Vereins Bank.

"This kind of powerful move means that either the internal Fed forecast is far worse than they are letting on, or it raises a question about the transparency of the Fed," he said.

On Tuesday, Greenspan's second-in-command, Vice Chairman Roger Ferguson, will discuss the economy -- an appearance in Pittsburgh that may offer some insight into the move.

A "SOFT SPOT," OR SOMETHING WORSE?

One aspect of the Fed's decision that puzzled some analysts was the statement announcing the rate cut. In it, the central bank said the risks to the economic outlook were "balanced" between inflation and economic weakness, a shift from its previous warning that weakness posed the greatest threat.

The Fed tends to use a balanced assessment to signal it will probably keep policy on hold for a while. But it struck some analysts as strange, in light of a stack of data underscoring economic fragility like falling payrolls, shaky consumer confidence and a renewed slump in manufacturing.

In sketching out reasons for the cut, the Fed described the economy as being in a "soft spot" -- a description that several economists said seemed to be an odd understatement.

After staging a recovery from last year's recession, the economy has lately appeared to have all but ground to a halt, leading some analysts to worry about a renewed downturn or double-dip recession.

Former Fed Governor Laurence Meyer said the description of the risks as balanced was intended to put to rest, at least for now, a frenzy of speculation about what the Fed might do next.

"They are saying to the markets: 'Back off,"' said Meyer, who accurately predicted the Fed move.

One fear that has emerged since the economy soured is the potential, however remote, that the United States could fall into a dangerous trend of widespread falling prices.

Analysts said this is one important topic that Greenspan may touch upon. The U.S. economy has not seen sustained deflation since the 1930s, but Japan has been grappling with a vicious cycle of sliding prices and weak consumer demand.

The U.S. Consumer Price Index (news - web sites) rose 1.5 percent in the year ended in September, a gain that is small enough to kindle talk about whether a Japan-style deflation could occur here.

Chan thinks deflation is a remote threat in America but he said Greenspan ought to try to put the worry to rest.

Minutes of the Fed's September meeting released last week said that some policymakers expressed concern that the current low rate of inflation could limit choices in setting rates.

TOO MUCH HAPPY TALK

In their discussion of the central bank's aggressive move last week, some economists took issue with what some saw as overly upbeat assessments from Fed officials in the weeks leading up to the Nov. 6 decision.

Jack Guynn, head of the Atlanta Fed, and Gary Stern, chief of the Minneapolis Fed, both counseled "patience" and predicted the already low rates would inevitably begin to lift growth.

Many in the markets wrongly thought the optimistic remarks meant the Fed would either refrain from cutting or would cut by a more modest quarter-point.

Boston Fed President Cathy Minehan was alone in offering a bleak assessment in mid-October, warning of the risk that consumer spending might falter.

Greenspan and most Washington-based Fed governors said little in public about the economy as the meeting drew near.

Financial markets did not begin to focus in earnest on the prospect of a rate cut until an Oct. 26 article in the Washington Post by veteran Fed reporter John Berry predicting a cut. The report cited anonymous Fed officials.

Chan said policymakers' optimistic comments appeared to be part of an attempt to offer a "psychological boost." But he added the central bank has fumbled in that effort, in part because of the wording of the Nov. 6 statement.

"The Fed wanted the markets to see think of the cut as a Christmas gift rather than a sign of panic, but they did not succeed in getting the reaction they wanted," Chan said.

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