CONFLICTED PICTURE MAY HOLD OFF FED.

Byline: Dave Skidmore Associated Press 

Federal Reserve policy-makers appear to be in a bind.

They'd probably like to dampen the economy with higher interest rates to prevent the biggest wage gains in eight years from fueling inflation.

But a rate increase could touch off renewed turmoil in jittery world financial markets.

Faced with those choices today, monetary policy-makers probably will opt for no change, most economists believe.

``They're in a bit of a box,'' said economist Mark M. Zandi of Regional Financial Associates in West Chester, Pa.

``They're very worried by the apparent fragility of the stock market and Asia, which would argue for no move,'' he said. ``On the other hand, there's the very strong economy and the acutely tight labor market.''

Two congressional appearances by Fed Chairman Alan Greenspan, only three weeks apart, illustrate the dilemma.

Though the annual inflation rate through the first nine months of the year has been running at a three-decade low of 1.8 percent, Greenspan warned Oct. 8 that the strength of labor markets suggests ``the economy has been on an unsustainable track.''

The question is when, not whether, labor costs will escalate, he said. And since labor accounts for roughly two-thirds of the cost of the goods and services consumers buy, that implies prices will start to increase faster, too.

Two weeks later, the U.S. stock market caught the Asian flu as waves of selling pressure rippled around the globe.

On Oct. 29, Greenspan told Congress the stock drop may have been a ``salutary event.'' By discouraging consumer spending and businesses investment, it could cool the overheated job market and help prolong the expansion, he said.

That reasoning, analysts said, puts the Fed on hold - exactly where it has been since March 25, when it last raised the benchmark rate on overnight loans between banks, from 5.25 percent to 5.5 percent.

``Right now you have some jitters in the stock market and the Fed certainly doesn't want to trigger a free fall,'' said economist Martin Regalia of the U.S. Chamber of Commerce. ``And we're not seeing inflation, so they don't have to do it just yet.''

However, he and other analysts said the concerns Greenspan focused on Oct. 8 haven't gone away. If anything, they've intensified.

Though economists have been forecasting a slowdown for months, economic growth during the July-September quarter was a robust 3.5 percent, even better than the 3.3 percent growth recorded in the second quarter.

Unemployment in October dropped to a 24-year low of 4.7 percent.