Top Federal Reserve policy makers met yesterday to confront a dilemma: how to keep inflation undercontrol and the U.S. economy out of recession with oil prices up more than $8 dollars a barrel in a month.

The problem is not just that the Iraqi invasion of Kuwait sent oil prices soaring, but that it happened at a time when the economy had already lost its wind and inflation was stubbornly high. Higher oil prices only made the Fed's dilemma more acute.

"The jump in oil is like a tax on the economy and a bubble on the inflation rate," said analyst Ray Stone of Stone & McCarthy, a financial markets research firm. "It's got to be a tough time at the Fed."

In fact, it is no less of a tough time for the U.S. economy. While there is no sign of a serious nationwide slump, some parts of the country and some industries are headed downhill, unemployment has begun to rise and higher oil prices have begun to work their way through the economy. Consumers were already spending cautiously when the invasion occurred, and some forecasters fear the new uncertainty about economic prospects will cause them to zip up their pocketbooks.

So far this month, all of the economic data have pointed to a softening of the economy. For instance, the number of payroll jobs fell in July, while retail sales rose a scant 0.1 percent and factory output was unchanged from June.

Part of the Fed's problem is that it has an admittedly powerful but ultimately quite limited tool with which to effect work -- the rate at which it supplies money to the U.S. banking system. Normally, if it pours more money into the system, both short- and long-term interest rates fall. If financial markets fear that the additional money will lead to higher inflation, however, long-term interest rates -- which generally are set by market forces rather than the Fed and are quite sensitive to expected inflation -- could rise.

For a moment, put yourself in the shoes of Fed Chairman Alan Greenspan or one of the other key central bank officials who sat around the table in the Fed board room yesterday.

Even if you favored easing monetary policy to give a boost to the economy -- lowering short-term interest rates by adding cash to the banking system -- you might have paused. If financial markets took the move the wrong way and bid up long-term interest rates because of a fear the Fed was abandoning its effort to bring inflation under control, then easing policy might backfire. After all, the level of long-term rates is usually more important to the economy than short-term rates, most economists believe.

Suppose, on the other hand, that your principal concern is making sure that inflation does not get out of hand (several of the officials around the table yesterday have taken that position in the past on the grounds that the way to maximize long-term economic growth is to lower inflation). In that case, you did not want to pump money into the economy at a faster rate.

Nevertheless, even an anti-inflation hawk might hesitate to stand by while the economy drops into a recession if only for fear of a political backlash against the Fed that could restrict its freedom to fight inflation in the future.

Of course, Fed policy is only one of myriad influences on the economy. The economy might well move into a recession, or stay out of one, regardless of whether the central bank seeks to lower short-term interest rates.

As usual, the Fed made no announcement about any decisions it made yesterday. Stone and most financial analysts expect the Fed to lower rates slightly, though not necessarily right away.

Another aspect of the Fed's dilemma is that foreign exchange traders, focusing on the weakness in the U.S. economy, believe short-term interest rates are headed downward. Since that means a lower return on investments here, there is less demand for dollars and its value has been falling compared to the Japanese yen, German mark and several other currencies. A lower dollar can help spur U.S. exports, but it also makes imported goods more costly, which adds to inflation.

Meanwhile, with the Japanese and most West European economies growing faster than that of the United States, central banks in the other countries have been raising interest rates to keep inflation from worsening. That probably makes it less likely that long-term rates will fall significantly here short of a sharp economic slump, many analysts believe.

All in all, it probably was not much fun to sit around that Fed table yesterday. Whatever else it can or cannot do, Stone noted, "The Fed can't control oil prices."