Federal Reserve Chairman Faces the Test of His Career.

Byline: Kimberly Blanton

May 16--Federal Reserve chairman Alan Greenspan, in his meeting today with central bank policy makers to set interest rates, faces the most difficult test of his remarkable career at the Fed: Can he ensure that the nation's longest economic expansion continues?

Most economists expect the Fed to boost interest rates by a half-point, continuing a campaign begun last summer to rid the economy of inflationary tendencies. A few economists returned to earlier predictions of a quarter-point increase after the newest batch of data, released last week, showed wholesale prices had dropped and retail sales had slowed.

But while the world is focused on how much rates will rise, members of the Federal Open Market Committee, headed by Greenspan, are focused on the policy dilemmas involved in deciding how much to raise rates, economists say.

A big hike could further unsettle financial markets, causing stocks to tumble and making it more difficult for the Fed to engineer a smooth landing. But if the Fed does too little, the market might soar or the economy might continue to barrel along, unleashing the inflation that has crept up but has not yet entered the "red zone."

"The Fed's goal of maintaining price stability is very much at risk here," said Allen Sinai, president of Primark Decision Economics, a Boston consulting firm. "Finding the exact amount and doling it out, with the right timing, is harder than the choices the Fed has had to deal with in most of the 1990s."

The Fed's policy dilemmas are in addition to the unique concerns posed by an election year, as was true in the early 1990s, when tight monetary policy was blamed for the incumbent party's loss of the presidency. Republican George Bush was defeated by Democrat Bill Clinton.