US Economy Puts on Stellar Show, but the Fed Watches Asia

Like a long-running Broadway hit, the American economy continues to turn out a strong performance - and to play to rave reviews.

The Federal Reserve board, perhaps recognizing a hit show when it sees one, was expected yesterday to leave well enough alone. By holding key Fed interest rates at 5.5 percent, the central-bank policymakers would signal to businesses and consumers that the cost of borrowing money will remain stable.

But it may also be that the Fed is also carefully watching a faltering performance by the Asian economies. If not for Asia, many analysts believe the Fed already would have sought to cool the US economy with higher rates.

Consider:

* Unemployment in November, at 4.6 percent, was at a 24-year low, and the scarcity of qualified workers propelled a wage gain of more than 4 percent over the past year. That's more than double the inflation rate for the first 10 months of 1996.

* Surging industrial production, meanwhile, has pushed the operating rate at factories and utilities to 83.2, the highest level in more than two years.

* Construction of new housing shot up 0.8 percent in November to a seasonally adjusted annual rate of 1.5 million units - the highest level in nine months. Experts attribute this to stable interest rates.

ECONOMIST Robert Brusca of Nikko Securities Co. International Inc. in New York predicted that the Fed will wait until either of its next two meetings, on Feb. 3 and 4 or March 31, before increasing rates. Rates haven't changed since last March, when the Fed raised its rates one-quarter of a percentage point.

"The Fed's willing to wait, but it's waiting in a very nervous fashion," he says. "The smoke will clear during the first quarter."

But for the first time, more than a few economists are arguing that the Fed's next move will be to cut interest rates - not raise them.

That's because inflation itself - as opposed to pressures that could potentially lead to inflation - has been exceptionally tame. Consumer prices inched just 0.1 percent higher in November, holding the inflation rate for the year to 1.8 percent, the best since 1986.

"Ultimately, we believe the deflationary environment will lead the Fed to ease policy," says economist Bruce Steinberg of Merrill Lynch. "Those worried about inflation are fighting the last war."

In fact, any increase in US interest rates would make dollar-denominated investments more attractive and thus would further strengthen an already-strong dollar. Asian currencies would weaken in comparison, adding to the region's turmoil.