Greenspan may not wait to test his theory on geopolitcal risk. (Wall Street West).

FEBRUARY'S disastrous employment report convinced many economists the Federal Reserve would cut rates again when it meets Tuesday.

The Fed funds futures market was already tilting in that direction, taking its cue from the latest round of weak economic data. There has been no relevant guidance from Fed officials on whether they're ready to lower the overnight rate from its 1.25 percent perch.

An article in The Wall Street Journal, one of the publications thought to serve as a mouthpiece for Fed Chairman Alan Greenspan, talked more about what the Fed would do if war with Iraq didn't quickly lift the pall hanging over the economy.

It may not matter whether the Fed cuts the funds rate to 1 percent or leaves it at 1.25 percent. More important is Greenspan's credibility, which has been losing steam in recent weeks.

Greenspan has reiterated so often his view that "geopolitical risks" are restraining economic activity and the stock market that it's become his strong-dollar mantra. So here we are, probably one or two weeks away from the event that is supposed to liberate both the Iraqi people and the American economy, and Greenspan is going to deny his hypothesis a test?

Weekly unemployment claims have spiked higher since January. Consumer spending has lost some momentum, along with confidence. Auto manufacturers are scaling back second-quarter production plans.

Still, Greenspan's stretch into areas that aren't in his knitting basket, puts him in an awkward position to act.

Last month, Greenspan discouraged Congress from implementing additional fiscal stimulus.

While the Fed chief supported the elimination of the double taxation of corporate dividends in theory, he said Congress should ensure the cuts are revenue neutral; that is, the revenue loss should be neutralized by spending cuts.

"I have always supported the elimination of the double taxation of dividends because I think it is a major factor restraining flexibility in our economy," Greenspan said. "But it should be in the context of pay-go rules, which means that the deficit must be maintained at minimum levels."

If it struck you that fiscal policy was out of Mr. Greenspan's ken, what would you say about his moving into the commodities arena?

At a meeting of the Group of Seven industrialized nations in Paris last month, Greenspan wowed his colleagues with his in-depth briefing on oil markets, and discouraged tapping the G-7's large oil reserves.

Oil inventories in the U.S. are close to a 28-year low. Yet according to Treasury Secretary John Snow, Greenspan told the group that "there is quite a lot of flexibility in the system."

The International Energy Agency doesn't agree. In its March report, the autonomous agency that acts as an energy forum for 26 OECD countries said supplies were tight, that "a further supply disruption would tax a system operating at close to capacity."

Maybe in the old days, when Greenspan's credibility was flying as high as the Nasdaq, soothing words from the Fed chairman would have helped. Crude oil prices are up 50 percent in the last 12 months, and they aren't heading south until the extent of the supply disruption can be quantified, not anticipated. With Greenspan saying no to Congress on fiscal policy and no to our allies on tapping strategic oil reserves, he would look foolish cutting the funds rate with his geopolitical risk theory soon to be tested.

The Fed will probably change its risk assessment of the economy from balanced, which is where it's been since the Nov. 6 meeting, to one tilted toward greater economic weakness (the other alternative is higher inflation). The interpretation will be that the Fed stands ready to act in case those geopolitical risks don't resolve themselves quickly. Reading between the lines, the shift in the risk assessment may suggest Greenspan is starting to question his own theory.

Camline Baum, Bloomberg News