The economy’s screeching slowdown from a sizzling 5.6 percent expansion pace at the start of the year to a plodding 2.5 percent recently would seem to make monetary policy a no-brainer.

That is, hold interest rates steady. Otherwise, the job market may crumble and sales of cars, houses, gasoline and consumer items could tumble off a cliff.

Don’t tell that, though, to policy-makers of the Federal Reserve, who meet Tuesday. Their comments indicate they might raise short-term interest rates for an 18th time in barely over two years. Their reasoning: inflation is not yet dead.

Economist Brian Wesbury says that should the Fed go ahead, and raises its short-term lending barometer by a quarter-point to 5 percent, there is little cause for worry.

“Back in the late 1990s, the economy boomed, even though the average short-term rate was 5.4 percent and the average 30-year mortgage rate was 7.6 percent,” said Wesbury, of First Trust Advisors in Lisle. Currently, the 30-year mortgage rate is around 6.7 percent, he added.

Wesbury says that while the Fed seems to be leaning toward another irate hike, there is a chance policy-makers will take a pause. If they do, however, he foresees more monetary tightening later this year.

Retail reports due

The idea that consumers are running low on firepower will get a test Friday, with July retail sales. Economists are calling for a gain of 0.5 percent, following slippage of 0.1 percent in June.

Rising unemployment and tepid payroll growth, as reported Friday, indicate that interest rates should not ratchet higher, says Professor Peter Morici of the University of Maryland School of Business.

“Subpar job growth indicates the economy is slowing more than Wall Street analysts and Federal Reserve policy-makers anticipated,” he said. “A weaker housing market and higher gas prices have slowed consumer spending, and this is slowing business investment, construction and jobs creation significantly.”

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The stock market has gone essentially nowhere since Memorial Day, with blue-chips slightly higher and small caps a bit lower. Traders have been paralyzed by worries about the Fed and the steepening price tag for fuel.

Economist Gail Fosler of the Conference Board says there is greater risk in markets overseas than on Wall Street, but clear signs of economic slowing offer a warning sign for investors.

Looking globally, she says, “financial markets are set to take a drubbing, not because of some remote inflation scare but because current valuations project demand and/or profitability years – sometimes decades – into the future and are thus highly uncertain and risky.”

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(c) 2006, Chicago Tribune.

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AP-NY-08-04-06 1502EDT