bank stocks, but that prospect now seems ever more distant.

By most signs, the economy remains strong enough to worry officials at the Federal Reserve about an uptick in inflation -- perhaps wage inflation generated by the nation's tightest labor market in 30 years.

"The real question now is whether one more Fed rate hike will be enough" to slow the economy's growth to a more sustainable, noninflationary pace, according to economist Nicholas S. Perna of Fleet Boston Corp.

The central bank has already raised short-term rates twice this year and two weeks ago said it had adopted a "tightening bias" in monetary policy that may mean rates could move up another notch Nov. 16 when Fed policymakers next meet in Washington.

Assuming the Fed sticks with its preference for action in quarter-point increments, another increase would put the key federal funds rate back where it was in September 1998 -- at 5.5% -- before the central bank stepped in with a trio of quarter-point rate cuts to calm the tumult in world financial markets. The Fed has said it believes that this easing has served its purpose.

However, rate hikes beyond an additional quarter-point, or even hints that they might be necessary, would probably jolt the stock and bond markets and deepen the pall that has enveloped bank stocks since spring.

Bank stocks customarily underperform other stocks when rates are rising. The Standard & Poor's bank stock index is down 21.8% since the Fed began raising rates on June 30 and off 17.3% for the year.

"For bank stocks to have any chance of doing well, it has to be clear that the Fed is at the end, or near the end, of a period of rising rates," said Frank W. Anderson, an independent banking industry analyst in Dallas.

The problem for bank investors is that the economy has not slowed as much or as quickly as anticipated by forecasters, including those at the Fed. Many analysts and economists felt four months ago that the central bank would not have to raise short-terms rates by more than a quarter-point to achieve its aim.

Now every succeeding economic statistic seems to add to the puzzle.

Economists at Merrill Lynch & Co. said the firm's forecasting model, called the Merrill Lynch Fed Reaction Function, is now balanced between two opposing forces. Though inflation is "virtually nonexistent," consumption demand continues strong, and unemployment is low. Merrill's economists said they expect the Fed to raise rates again in November, then keep them on hold for a while.

A good signpost to the current uncertainty is the Labor Department's paradoxical September employment report. It unexpectedly showed payrolls shrinking by 7,000 while average hourly wages advanced a healthy seven cents. At the same time, the unemployment rate remained 4.2%.

After dismissing much of the report as a statistical quirk, economist Ian Shepherdson of High Frequency Economics in Valhalla, N.Y., offered this assessment: "Our central view remains that the unemployment rate is low enough to push up wage increases but not so low that the increases will be inflationary."

He added that this assumes the Fed "can slow the economy sufficiently to stop the unemployment rate from falling further." Right now, however, there is "little evidence" that the economy has really slowed, except in the rate-sensitive housing and construction sectors, Mr. Shepherdson said.

"Instead of slowing, consumption, the biggest GDP sector, is actually accelerating," said Gary L. Ciminero, an independent economic adviser based in Providence, R.I. He said he thinks the Fed will reaffirm its tightening bias in November but confine its actions to "jawboning" because of yearend concerns about the effect of year-2000 computer problems.

The "overhanging threat" of Fed action should flatten stock market sentiment, he said. And that is clearly something the Fed wants to see because it would dampen consumer enthusiasm.

Minutes of the Aug. 24 meeting of the policymaking Federal Open Market Committee, released 10 days ago, said the wealth from the huge bull market in stocks has "helped to foster a high level of consumer confidence and willingness to spend. The absence of further large gains in stock prices, should recent trends persist, would remove this stimulus and probably induce some moderation in the growth of consumer spending."

The outlook for inflation also remains elusive. Though it has remained low, some economists think a pickup may already be in the works.

The unemployment rate may fall even lower in coming months, making a spike in wage inflation a distinct possibility, according to Edward Yardeni, chief economist at Deutsche Banc Alex. Brown in New York. That would quickly strengthen prospects for Fed action.

On the other hand, if the economy does slow, so would productivity growth -- and it is improved productivity that has kept unit labor costs down in a tight job market and contributed to such favorable inflation numbers after eight and a half years of economic expansion.

If real economic growth returns to a 2.5% to 3% annual rate from more than 4% earlier this year, the productivity growth rate would slow to 2% or less, from 3%, said Mr. Perna of Fleet Boston. That would mean the growth rate of unit labor costs would likely rise from its current 2% to 3% pace, eventually feeding inflation, he said.

If this does not come to pass, "the Fed would probably keep rates relatively flat, maybe even let them fall a little, while still on the lookout for inflation," he said. But if labor costs rise, "then the FOMC is quite likely to tighten a lot in order to head off more serious inflation."

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