ACTION BY FED COULD END GUESSING; INVESTORS DIVIDED OVER RATE INCREASE.

Byline: Jonathan Fuerbringer The New York Times

Will the Fed just wait?

That's the nagging question for investors ahead of Tuesday's meeting of the Federal Reserve's policy-making committee.

Indeed, for many on Wall Street, the only thing worse than the Fed's raising rates next week is the Fed's deciding not to raise rates. Why? Since many investors believe that at least one more rate increase this year is inevitable, it makes sense to them to get it out of the way now.

In contrast with March, when analysts were overwhelmingly convinced that the central bank would raise short-term interest rates rather than hold them steady, sentiment on Wall Street is split about what the Fed will do. Inflation is practically nonexistent and the robust growth of the first quarter appears to be fading - reasons for the Fed to hold off.

But if the Fed leaves its target rate at 5.5 percent Tuesday, uncertainty may dog the financial markets and stocks and bonds are more likely to experience sharp ups and downs this summer, extending the roller-coaster ride of recent months.

``It makes for a more uncertain market and, therefore, the possibility of a more volatile market,'' said Richard Berner, chief economist at the Mellon Bank in Pittsburgh.

Unless the economy slows much more than expected, every new economic report will be scoured for hints of what the Fed's policy-makers will do when they gather again in July. And given the erratic nature of a lot of the government's statistics, markets could be in for some wild swings.

What would be especially tough is a string of economic reports indicating that the slowdown in consumer spending in April was simply a pause rather than a genuine downshift in the exuberant pace of earlier this year. Traders would conclude that the economy was too strong for the Fed to feel confident that inflation would remain under control, reversing the sentiment underlying the recent rally. Interest rates would move higher and stock prices lower.

With a rate increase next week, the outlook would be different, even if stocks and bonds tumble initially.

On one hand, if the slowdown is confirmed in economic reports for May and June, then a Fed rate increase next week would clear the way for a market rally. With two Fed rate increases already in the bag, investors could fairly conclude that the central bank would wait quite a while before acting again.

On the other hand, even if the economic news turns out to be less comforting to Wall Street, the Fed's back-to-back rate increases would help squelch speculation that the central bank would try a third rate increase so soon. And the confidence that the Fed was ahead of the curve would help cushion any fall.