WITH financial markets around the world riveted, Federal Reserve policy makers will gather this week to consider raising interest rates for the first Aime in more than two years.

Central to that debate will be the question of whether the economy is moving ahead too quickly - will low unemploy and increasingly tight labour markets bid up wages further and ultimately - increase inflation?

After a series of comments over the past several weeks by the Federal Reserve chairman, Mr Alan Greenspan, many experts have become convinced the Federal Open Market Committee will opt to raise rates at its meeting tomorrow to try to slow the economy a little and head off inflation.

At his most recent appearance last Thursday before Congress's Joint Economic Committee, Mr Greenspan acknowledged that inflation under control, but he repeatedly emphasised the need to act early to combat inflation.

He has strengthened his comments each time he has spoken about the probability that Fed would move sooner rather later if the economy did not show signs of slowing, said Mr David Berson, chief economist at Fannie Mae, a company that pools US home mortgages for sale on the secondary market.

It looks as though the chances are pretty good that the Fed will raise rates, Mr Berson added.

Many lawmakers at Thursday's hearing appeared resigned to the prospect of a rate rise, as both Democratic and Republican officials attempted to persuade Mr Greenspan that it was not needed given the low levels of inflation recently.

US stock and bond markets, which have suffered bouts of selling over the past few weeks in response to various comments from Mr Greenspan and other Fed officials, are also braced for tighter credit.

Nonetheless, many analysts believe that any decision to raise rates will be a difficult one.

Mr Greenspan has repeatedly warned of the risks to inflation posed by tight labour markets, but at the same time, has acknowledged that prices so far are very well behaved.

The state of inflation at this particular stage is clearly under control he said on Thursday. But he added, "What we at the Federal Open Market Committee are going to have to judge is ... what is the state of the economy later this year and into 1998 when any actions we may or may not take would become effective?"

The Federal funds rate, a bench mark for other short term rates that is the Fed's main lever for influencing the economy, now stands at 5.25 per cent. Most of those forecasting a rate rate rise look for a modest increase of a quarter percentage point.

The last time the Fed raised rates was in February 1995, when it completed the last of a series of increases that resulted in a doubling of the funds rate during 1994 to 1995.

While economists see little chance of such drastic action at this stage, many believe a rate rise on Tuesday could be followed by others.

The economy is simply growing too strongly, said Mr Lyle Gramley, a former Fed governor who is now consulting economists at the Mortgage Bankers Association. "We're not looking at another 1994 but if (the Fed moves) in March, it won't be the last one."