The reason: Overall inflation isn't accelerating. Consumer prices minus food and energy rose just 1.3 percent for the 12 months ending October, the lowest level since the 1960s. The Fed has said ``consumer prices remain muted'' in its last three statements.

``Any real pickup in inflation would seem to be a long way away,'' said Peter Kretzmer, senior economist at Bank of America Securities. Even if prices start to rise, they ``will begin to increase from a low point. The Fed can be more patient.''

That means the Fed will keep its benchmark overnight lending rate at the 45-year low of 1 percent, where it's been since June 26, Kretzmer and other economists say. Fed policy makers began their meeting at 9 a.m., a spokesman said, and their decision and its post-meeting policy statement are expected around 2:15 p.m. Washington time.

Growing Economy

The central bank has kept rates low to stimulate the economy. The result has been negative short-term yields in inflation-adjusted terms on money market accounts and bank deposits, an inducement for consumers to buy rather than save.

Some economists, including David Malpass of Bear Stearns & Co., say the Fed's posture may be appropriate for an economy in recession or on the brink of deflation but may no longer be so for the booming U.S. economy.

The economy grew at an annual rate of 8.2 percent in the third quarter, the fastest in almost two decades. Growth will reach 4 percent or more in the fourth quarter and in each quarter next year, according to the median forecasts in a Bloomberg News survey of 62 economists. That would be the longest such string since the six quarters that ended in June 1984.

Such growth points to an economy where prices are likely to heat up, Malpass said. ``We don't think interest rate hikes will come soon enough to avoid an inflation problem,'' Malpass said in a television interview with Bloomberg News last week. ``We note shortages across an increasing range of sectors, from ships to steel to agricultural products.''

Not to Worry

The Reuters CRB Index, an indicator that tracks 17 different commodities, from live cattle to crude oil, has risen 11 percent this year. Gold is $407 an ounce, up 17 percent over the past year. Copper is up 39 percent, oil 31 percent, and natural gas prices are 51 percent higher than at the end of October.

In addition, the dollar dropped to a record $1.22 against the euro and fell to its lowest in more than a decade versus the British pound yesterday. That helps boosts the price of gold and other dollar-priced commodities on international markets and also makes imported goods more costly.

Fed officials still say they don't see reason for concern. Inflation ``might be climbing off the bottom of the range,'' Fed Governor Edward Gramlich said in an interview last month, but it ``isn't accelerating by any stretch of the imagination.''

Gregory Mankiw, chairman of the President's Council of Economic Advisers, said there's a good chance market interest rates won't rise quickly and force the Fed's hand. ``Long-term interest rates and market-determined interest rates, some people expect them to rise slowly as the economy recovers. That is very typical in recovery, that may happen again,'' Mankiw said in a television interview.

Labor Costs

At the core of the central bank's thinking on inflation is the way the U.S. economy has changed from one based on manufacturing, and how globalization has altered companies' access to labor and raw materials. In this new world, labor is the primary resource and wages and employee costs are the main indicators of inflation.

According to Fed chairman Alan Greenspan, U.S. output is increasingly measured by innovation, ideas and intellectual property, such as software codes and drug patents.

``The physical weight of our GDP is growing only very gradually,'' Greenspan said in 1998, an idea he has often repeated. ``The exploitation of new concepts accounts for virtually all of the inflation adjusted-growth in output.''

That makes people the most important part of production. Looking at human resources, or labor, to estimate how fast the economy can grow is ``the fundamental way in which the (Fed) board would model inflation'' today, said Laurence Meyer, a Fed governor from June 1996 to January 2002 and now a visiting scholar at the Center for Strategic and International Studies in Washington.

If jobs and labor costs are the guideposts, the data show the U.S. economy is still far from an inflation problem, because productivity is growing at an unexpectedly fast rate. Output per hour rose at a 9.4 percent annual rate in the third quarter, the most in two decades.

`Powerful Force'

That means companies can meet rising demand without having to hire as many workers. Even as growth in gross domestic product soared, unit labor costs fell 2.2 percent in the third quarter from the year-earlier period, the eighth consecutive quarterly decline.

``Productivity is going up faster than wages, and the difference is declining unit labor costs,'' said Robert Brusca, head of the economic consulting firm Ecobest. Falling labor costs ``are a powerful force of disinflation.''

Though the national unemployment rate fell to 5.9 percent from 6 percent in November, average hourly wages rose just a penny, or 0.1 percent, the department said.

The so-called augmented unemployment rate, which adds in people who aren't captured in unemployment data but who would take a job if offered, stood at 8.7 percent in November, the Labor Department reported Friday.

So while the supply of some commodities may be temporarily scarce, raising their price, the supply -- and price -- of workers is not. That enables companies to absorb the commodity price increases without passing price increases on to consumers.

Just today, SBC Communications Inc. the second-largest U.S. local-telephone company, said it will cut 3,000 to 4,000 jobs this quarter as part of an ongoing workforce reduction. And ChevronTexaco Corp., the second-largest U.S. oil company, said it will sell properties in 15 states that account for 5 percent of its daily production, and eliminate 150-200 jobs in the United States.

Eventually, several quarters of growth exceeding the rate of productivity increase will begin to use up both raw materials, plant capacity, and labor, creating an ``inflection point'' that will lead to higher inflation, said Richard Berner, chief U.S. economist for Morgan Stanley.

Former Fed Vice Chairman Alan Blinder said in a television interview he doesn't expect the central bank to raise rates until ``May at the earliest, and it could well be later than that.''

Just when it does happen depends on how job growth, consumption and productivity proceed. Until the Fed sees evidence it is happening, rates will remain unchanged. ``For me personally, we have to see a little more evidence,'' the Fed's Gramlich said.