Drumroll, please. The balancing act could hardly be trickier for the Federal Reserve monetary policymakers who will gather Tuesday in Washington to mull economic matters and interest rates.
The Asian financial crisis, which the central bank had been expecting to brake the U.S. economy and obviate the need for credit tightening, actually has been boosting business conditions.
The phenomenon presumably can't continue much longer. Already, U.S. exports are falling and imports are surging as a result of the crisis.
On the other hand, the amazing resiliency of the nation's economy has surprised and confounded many economists.
"Rather than harming our economy," said economist Gary L. Ciminero, "so far the net effect of the Asian crisis has been to prolong its superb performance."
Meanwhile, labor market conditions remain tight, perpetuating Fed concern about wage-based inflation, and recently renewed efforts by oil exporting nations to curb supply could raise energy prices.
Most watchers still expect the Federal Open Market Committee to stand pat on rates this week, but the Fed officials will be forced to weigh a much more difficult and conflicting set of circumstances than was anticipated at their last session, two months ago.
One reason the Asian situation has so far bolstered, rather than hindered, the U.S. economy is interest rates, according to Sung Won Sohn, chief economist at Norwest Corp.
"Money fleeing Asia has depressed bond yields," he said. Perhaps ironically, the situation has also been helped by the Fed's decisions not to rock the boat.
As a result, Mr. Sohn said, "interest-sensitive sectors are booming. Housing starts and home sales are robust; mortgage bankers are having difficulty keeping up with new loan requests. Demand for mortgages as well as commercial and industrial loans is strong."
At the same time, declining prices for Asian imports, the plunging price of oil, and generally low price inflation "have fortified consumers' buying power, which rose about 4% last year," the economist noted.
Can the inflation news possibly stay so good? "The answer depends on the outcome of a battle between two conflicting factors," said Mr. Ciminero, who heads Independent Economic Advisory, a consulting firm in Providence, R.I.
The tug of war is between the deflationary force of the lofty dollar, which reduces import prices and keeps a lid on domestic prices, and "the eventually inflationary force of increased labor costs."
The economy's remarkable buoyancy has also restarted the running of the bulls on Wall Street. But the stock market's recent series of new highs may also rekindle the Fed's concern about "irrational exuberance"-in the memorable phrase of Fed chairman Alan Greenspan.
Meanwhile, Mr. Sohn cautioned that the full impact of Asia's troubles will ultimately reach these shores. "Rest assured that the Asian typhoon has not gotten lost in the middle of the Pacific," he said.
"Industrial production in Asia has begun to plunge," he said. "Asian firms are having problems producing exports, partly because of the credit crunch. But the logjam in the credit markets is easing."
The brunt of the Asian impact on the U.S. balance of trade and financial markets is yet to come, he advised, and "it will be stretched over a long period."
Right now, the Fed's hands probably remain tied, he said. "But how long will the central bank be patient, given the drum-tight labor market? If Asia continues to stimulate U.S. economic growth, interest rates could be hiked.
"Since the markets have been expecting rate cuts, not increases," he said, "higher interest rates would come as a big jolt."
