FED MAY BE FORCED TO STOKE WALL STREET.

Byline: Dave Skidmore Associated Press 

Federal Reserve officials like to say that interest-rate policy is aimed at Americans on Main Street, not at Wall Street's hard-charging traders.

But with stock-market gains increasingly propelling everything from record home sales to car buying, many economists believe the Fed has little choice but to cater to the whims of a touchy, overvalued market.

``It's obvious that stock prices are driving consumer spending to an extent I don't think we have seen before,'' said economist Norman Robertson of Smithfield Trust Co. in Pittsburgh. ``And so the Fed is indeed over a barrel.''

The relationship, said economist Robert Dederick of Northern Trust Co. in Chicago, is ``sort of a mutual admiration society.''

``The economy is doing well and therefore the stock market is doing well. The market is doing well and that helps the economy do well,'' he said.

The problem is that the same relationship can hold true in reverse. A drop in the market could quickly translate into trouble in the so-called ``real economy,'' where Americans earn their living and buy cars, homes, haircuts and cruises.

``At the moment, it's really the U.S. consumer that's the one point of strength in the global economy - and that spending is very dependent on high stock prices and easy credit,'' said economist William A. Brown of J.P. Morgan & Co.

``Were there to be a reverse in financial markets . . . I think you'd be surprised at how quickly we could move from a world of surprising strength to a world of surprising weakness,'' he said.

Many economists believe just such a reverse is entirely possible as waning world demand increasingly crimps the profits of American companies.

``Somehow, someday, the price of a share of stock has to be related to a company's earnings,'' said economist Carl R. Tannenbaum of LaSalle Banks in Chicago. ``And corporate earnings are really very flat.''

The Fed's monetary policy panel - the Federal Open Market Committee - began a two-day, closed-door meeting Tuesday. It is confronting evidence of rapid economic growth that, usually, would prompt the policy-makers to raise interest rates to cool demand and head off the possibility of increased inflation.

Most economists, however, believe the Fed will leave short-term rates unchanged. That's despite surprisingly boomy signs that include record new home sales - at annual rates of 1.02 million in November and 978,000 in December - and the fastest overall rate of economic growth in 2-1/2 years - 5.6 percent in the October-December quarter.

The reason: Fear that financial markets are vulnerable, that an interest-rate increase or a renewed outbreak of world financial turmoil could cause a repeat of last fall, when the Dow Jones average of industrial stocks plunged nearly 20 percent in the weeks after Russia's ruble was devalued.

The market swiftly recovered in October and November after the Fed cut the benchmark rate on overnight loans between banks three times, reducing it from 5.5 percent to 4.75 percent.

Fed Chairman Alan Greenspan told Congress last month that rescuing the market was not, and is not, the central bank's goal.

``Our objective is the maximum sustainable growth of the U.S. economy, not particular levels of asset prices,'' he said.

At the same time, Greenspan acknowledged that the stock market's impact on consumer spending has become ``real and significant.'' A severe drop in stock prices ``could lead to a considerable weakening of consumer demand,'' which accounts for two-thirds of the nation's economic activity, he said.