The last thing the stock market needs is another shock. But if a heavyweight investment strategist, William Knapp, knows what he’s talking about, one could be on the way next Wednesday. That’s when the Federal Reserve’s Federal Open Market Committee holds its next meeting to decide whether to cut the key interest rate.

While most Wall Street pros think another cut is about as certain as death and taxes, and the futures market also suggests that it is highly likely, Mr. Knapp disagrees. He thinks there’s a 50% chance there won’t be any rate decrease — a surprise, some pros say, that could bloody the market once again.

“If there’s no rate cut Wednesday,” a Merrill Lynch trader tells me, “investors should run, not walk, to the nearest Wall Street shelter, because it would be a bombshell, and you could see a substantial market decline, maybe 200 to 250 points in the Dow. You have to keep in mind that practically everyone expects a cut. It’s not something that’s a matter of speculation, but more like an expectation that’s written in stone.”

A San Francisco money manager, Gary Wollin, who runs nearly $100 million of assets under the banner Gary Wollin & Company, expresses a similar view. “If the Fed does nothing and doesn’t offset its non-action with positive verbiage, the market could take a big hit,” he says.

This is a sharp reversal from Mr. Knapp’s view from about six weeks ago, when he told me that he expected the Fed to reduce rates 25 basis points at its April 30 meeting and then initiate a similar reduction at its follow-up June 24–25 parley.

Now Mr. Knapp — who helps guide investment strategy at a $37 billion money management subsidiary of New York Life, Main-Stay Investments — strongly challenges the overwhelming view that the wave of rate cuts the Fed kicked off last summer to bail out a sinking economy and prevent a severe recession will continue at the central bank’s next policy meeting. The Fed has initiated a series of cuts since last summer that has knocked short-term rates to 2.25% from 5.25%.

Citing in particular mounting inflationary worries, especially on the food and energy fronts, and an impending kickoff of increased economic zip, Mr. Knapp is having serious second thoughts and says he is leaning toward the view that the Fed will stop cutting rates. He’s looking for one of two scenarios when the FOMC meets next: “Either the Fed will forgo a rate decrease and say it will remain vigilant, or it will cut rates 25 basis points and say that’s it.” A 50 basis-points reduction, he believes, is off the table.

Elaborating on inflation risks, Mr. Knapp notes that over the past year import prices have risen 15%, while petroleum prices have jumped 60%. In the same period, consumer inflation has risen 4%. Meanwhile, producer prices rose 1.1% in March, while crude energy materials climbed a sizable 13.4% for the month.

Also factored into his rate thinking is his view that economic weakness may bottom out at the end of this month. Supporting this argument, he observes that consumers are still increasing their real spending, but not a lot; housing may be nearing a bottom; mortgage refinancing should pick up, and exports are booming because of continued weakness in the dollar (trade added about 1% to GDP in the last two quarters). He also takes note of the economic benefits of credit easing and the fiscal stimulus package, with rebate checks scheduled to reach consumers next month.

Mr. Knapp is convinced a recession — as measured by two consecutive quarters of negative growth in the gross domestic product — is not in the cards this year. More realistic, he believes, is GDP growth of about 2%.

So far, he observes, “weak economic data continue to show the U.S. is on shaky economic ground, but not quicksand just yet.” He does note, though, that oil’s topping of $115 a barrel threatens to immolate recovery expectations. As for whether the markets will plummet if the Fed doesn’t cut rates, Mr. Knapp disagrees with the other experts. He thinks investors will react favorably to a non-cut. Why? Because, he explains, “they would conclude that the Fed thinks the economy is on the upswing and it has done enough.”

dandordan@aol.com