Alan Greenspan expressed his regrets.

The Federal Reserve chairman last week reluctantly served notice that the central bank cannot wait much longer to see how the nation's shift to a "new economy" turns out. Interest rates must be raised, probably in two weeks.

"It may be many years before we fully understand the nature of the rapid changes" under way, he told the Economic Club of New York. "Regrettably, we at the Federal Reserve do not have the luxury of awaiting a better set of insights."

Reaction was muted, because investors had already spent most of January bracing themselves for what Mr. Greenspan was talking about. Yields have risen sharply in the credit market, to nearly 6.7% on the benchmark 30-year Treasury bond, and bank stocks have been jolted anew.

The questions remain: How much medicine will the Fed administer, and how will the economy and markets respond?

Most economists expect a quarter-point hike in short-term rates on Feb. 2, when Fed policymakers meet, but a half-point increase is not ruled out. The real unknown is how much further rates could be headed beyond that point.

Mr. Greenspan's remarks about the U.S. economy of the past decade were offered with a note of awe. "We are within weeks of establishing a record for the longest economic expansion in this nation's history," he said.

In February, the economic recovery will surpass the 106-month expansion of the 1960s. That expansion, however, was distorted by the Vietnam War and ended with higher inflation, which plagued the nation for a decade.

Remarkably, there is little inflation in the current economic boom. The core rate of consumer price inflation was up only 1.9% in 1999, the smallest gain since 1965, according to data released Friday.

Even with volatile food and energy prices factored in, the increase was only 2.7% last year - and the entire gain was due to higher oil prices. Consumer goods prices actually fell 0.4% last year, though consumer spending rose 5.5%.

"Inflation remains the dog that didn't bark," said Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York. If the economy slows and consumer demand cools, even more price discounting can be expected.

Contrary to many other forecasters, Mr. Steinberg expects that inflation actually will fall, with growth in the overall consumer price index and the core index both less than 2% this year.

The Merrill Lynch economist and others expect the Fed will raise rates, "because wealth-induced demand is growing faster than productivity-enhanced supply." Mr. Steinberg expects at least a half percentage point of tightening in two installments, and more if the economy does not slow.

Mr. Greenspan said it was "most remarkable" that inflation "has remained subdued in the face of labor markets tighter than any we have experienced in a generation." A search is on for explanations of patterns that have "defied conventional wisdom based on our economy's history of the past half-century," he said.

This "fascinating and unsettling" point in economic history has produced "imbalances" from the stock market "wealth effect" and a low jobless rate, he said, adding that the imbalances could drive up prices.

"In the end," he said, "balance is achieved through higher borrowing rates."

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