ALAN GREENSPAN could, but did not - although perhaps he should have - raise interest rates, that is. The Federal Reserve chairman and his monetary policy committee looked hard at the economic tea leaves, and read in them an impending slowdown in the American economy. So they left interest rates unchanged, a decision that permitted the Dow Jones index, after another brief pause, to resume its relentless advance towards 10,000. Whether they were right to do so is by no means clear.

The economy grew at an annual rate of 4.2% in the first quarter. Low interest rates combined with growth in real incomes to enable consumers to buy just about anything their hearts desired. And they did. Last month, car sales were up 6.3%, and industrial production was up 3.8% on year-earlier levels. Even normally glum retailers can find little of which to complain. But none of this convinced Greenspan to apply the brakes.

For one thing, he sees signs that the economy is slowing from its first-quarter pace, and believes the Asian crisis will further increase the flood of cheap, inflation-fighting imports. On that score he is certainly right. The trade deficit in March hit a record $ 13 billion, as exports to Asia fell by 15% while imports rose 11%.

From the point of view of an inflation fighter, this is good news. Increased imports combined with lower domestic production for export to cut an estimated 2.2% off America's first-quarter growth rate. This means that without the flood of imports, domestic output would have grown at an annual rate of 6.4%, and nobody doubts that growth at that rate would have triggered inflation. Better still, the imported goods came in at low prices - almost 5% lower than the price paid for imports a year ago.

Greenspan's bet that imports will help keep inflation down has so far paid off in more ways than one. Most obviously, prices have hardly risen. Less noticed is the fact that the economic boom, which in its early stages seemed to benefit only the well-off, is starting to trickle down. Everyone is aware the headline unemployment rate has fallen to just 4.3%. But dig deeper and you find that unemployment among blacks, Hispanics and even high-school dropouts, though still above the average, is at last declining.

Greenspan is clearly reluctant to do what one of his predecessors, William McChesney Martin, famously said central bankers often must do - take away the punch bowl just when the party is getting started. A policy that keeps interest rates low when fat cats are taking home huge bonuses but raises them just when Joe Sixpack is starting to see his pay cheque rise, might antagonise Congress sufficiently to have it rein in the Fed's independence.

Greenspan worries, too, that by increasing interest rates he might tip several Asian countries from crisis into chaos. A cooling of demand for imports would add to unemployment and unrest in countries that depend on America to buy their goods. It would also induce even more capital to flow into the safe haven of America.

These are all reasonable concerns. But so, too, are those of economists who feel the Fed's dithering will result in a burst of inflation before the year is out.

Start with labour markets. The demand for more work ers has until now been met by attracting former stay-at-homes into the workforce. That source is now exhausted, That is why employers have been dipping deeper into the ranks of the untrained to find workers and have begun to bid up wages. Hourly pay in April
was up 4.4% on a year ago, the largest rise in 15 years. Fringe benefits are rising, too. But productivity is not keeping pace, so unit labour costs are growing at the fastest rate in five years.

Then there is the knotty problem of asset inflation. Less than 18 months ago Greenspan worried about "irrational exuberance". Since then, shares have risen by almost 50%. Nobody knows whether this is the rise that precedes a fall, or a new plateau from which further increases are likely. But we do know people are richer, and are acting accordingly, saving only some 3% of their incomes, compared with more than 5% in the days when the Dow was below 9,000. Unless the market turns out to be a bubble that bursts, consumers are likely to keep spending, and to bid up the prices of other assets such as property.

Finally, there is the money supply. Monetarists are no longer flavour of the month. Greenspan, among others, points out that any relationship that may have existed between the money supply and inflation is more difficult to discern in recent data. But there is still a strong monetarist faction on the Fed board, and its members worry that the money supply is growing at its fastest rate in more than a decade. Surely, they argue, with all that money sloshing around an economy that cannot increase output because there are no more workers available, inflation must be around some not-too-distant corner.

So far, the worriers are in the minority. But if the economy fails to slow discernibly by the time Greenspan and his colleagues meet this summer, the inflation hawks will redouble their efforts to push through a modest rise in interest rates.