Ears pricked up on Wall Street last week after Federal Reserve Chairman Alan Greenspan spoke about deflation.

Fed watchers said his remarks, while typically difficult to categorize, could signal that the central bank would soon switch into a credit-easing mode.

Even some observers who see little chance of deflation-the phenomenon of falling prices-now think the Fed may cut interest rates this year instead of raising them, at least for a while.

"The risks have shifted the other way, and economic growth could turn out to be too slow," said Nicholas F. Perna, chief economist at Fleet Financial Group, Boston. But a pickup in 1999 could raise new concerns about wage inflation and spur rates higher, he said.

Until a week ago, Mr. Greenspan routinely dismissed the prospect of deflation and stressed that inflation is the enemy of sound economic growth. But a recent series of currency devaluations by financially troubled Asian nations has altered the debate.

While the Fed chairman again minimized the prospect of deflation during a speech Jan. 3 to the American Economic Association and American Finance Association, he presented a lengthy analysis suggesting he has studied the subject.

"Inflation has become so low that policymakers need to consider at what point price stability has been reached," he said. "Indeed, some observers have begun to question whether deflation is now a possibility."

One such observer is Edward Yardeni, chief economist at Deutsche Morgan Grenfell Inc., New York, who thinks deflation "is a much greater risk to the global economy than reflation."

Another is Lacy H. Hunt, economist and partner in Hoisington Management Co., Austin, Tex., who cites important parallels between the current situation in Asia and the 1920s and 1930s.

"In the 1920s, there was a major investment boom that led to overcapacity," he said. "Deflationary forces got started as early as 1925 and caused problems for other countries before reaching the United States," he said.

"From 1929 to 1933, 34 countries devalued their currencies against gold," he pointed out. "During that time, the U.S. remained on the gold standard, and the dollar, fixed against gold, appreciated sharply against countries leaving the gold standard."

He noted that these devaluations transmitted deflation to the United States, which did not abandon the gold standard until 1933-the last major industrial nation of that era to do so.

"Essentially, the same thing is happening today," he said. "While we're no longer on the gold standard, we're on the international dollar standard, and various Asian countries are devaluing against the dollar."

During the early 1930s, the Fed, following the conventional wisdom of the period, defended the dollar's value in gold by tightening credit and worsening the economic downturn.

"The rules of the game under the gold standard were that a country experiencing a gold outflow should raise rates and reduce its money supply," he said.

"That was done several times, even as production was falling and breadlines were forming. We exacerbated our own difficulties."

The Fed would surely not follow such a course again, but some economists worry that monetary policy has limited potency against serious deflation.

"I am not convinced the Fed's monetary policy can avert deflation," said Mr. Yardeni, "although they will try to do so by lowering the federal funds rate back to 3% by the start of the year 2000."

In Japan, which has recently experienced deflation, nominal interest rates near zero have not revived the economy. "The central bank there failed to stay ahead of deflation," said Mr. Hunt.

John Maynard Keynes, the best-known economist of the century, termed the phenomenon a "liquidity trap." Noted American economist Irving Fisher called it "dead deflation."

"In deflation, interest rates are very different in their effect," said A. Gary Shilling, an economist and money manager in Springfield, N.J. "Lower rates in that environment do not signal that the economy has come through a recession and is about to expand-only that you have falling prices."

Even right now, a Fed rate cut might not be felt as strongly as in previous cycles, he said.

"It's conceivable that a rate cut by the Fed this year may not provide the economy with the same kick as if credit had been previously tight and the economy in recession," he said.

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