"That happened after the rate-cuts of 1987," he says, "and it contributed to the 1990 recession.
Looming in the background is a question: Will the past five years' gains in productivity continue? Productivity growth has fallen off in recent months as the economy has slowed, and analysts are divided over how much of it will come back once the recovery begins.
"If it proves to be a mirage, inflation will be more of a risk," Wyss said.
There's also another factor: The dollar's continuing rise puts more pressure on the Fed to cut interest rates further. If it doesn't the US currency may come under even more strain, risking a precipitous plunge in the dollar's value later.
To some analysts, one big question that Fed policy makers must to resolve is how serious the threat from inflation will prove over the next few months. Settling that will tell them how much more stimulus is safe.
In recent weeks, policy makers have been playing down any inflation threat, contending that price pressures have been "contained." Fed Governor Laurence Meyer -- has warned that the Fed must take inflation into account.
How much of the Fed's blas
attitude reflects Chairman Alan Greenspan's real view and how much is just an attempt to prepare the markets for further rate cuts remains to be seen, says Paul Kasriel, economist at Northern Trust Company of Chicago.
"While they say that inflation is contained, I'm not sure that everybody outside believes it," Kasriel said. "If they ease very much, there could be some concern about the possibility that they are not really containing inflation as they say." As if to underscore the difficulty of next week's decision, investors have been hedging their bets on what the central bank will do. Predictions range from an interest-rate reduction of a quarter of a percentage point to a half point.
One difficulty is that since Wall Street already expects the Fed to reduce interest rates further, forgoing additional cuts entirely would risk sending stocks into another slump, which might heighten pessimism among busi-nesses and consumers.
"This decision is important to the markets," said the Capital Insights Group's Ira Kaminow. "Doing nothing would be a negative for the financial markets. If they do nothing, the equity markets will decline."
Meanwhile, private economists are churning out predictions ranging from a recovery to a recession. They also have a wide range of bets on what the Fed will do.
"That's what we pay them the big bucks for," Kasriel quipped.
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