Federal Reserve policy makers agreed last week to cut short-term interest rates slightly in response to a budget agreement, but they balked at commiting themselves now to another cut to counteract any further deterioration in the economy, according to well-informed sources.

The caution within by the Federal Open Market Committee (FOMC), the central bank's secretive top policy-making body, not only underscored a deep concern about a stubborn inflation rate but also reflected basic doubts about how effective the Fed can be in reversing the current economic slowdown by reducing interest rates.

The Bush administration, its own hands tied by the budget deficit, has been calling on the Fed to cut interest rates to avoid further economic damage.

Two days after the $500 billion federal budget deficit package was reached last week, the members of the FOMC agreed that the measures should trigger a cut of a quarter of a percentage point in short-term rates as soon as it became law, according to the sources.

Although there are growing signs of weakness in the U.S. economy, the FOMC did not go along with a suggestion by Fed Chairman Alan Greenspan that it also approve a second cut linked to signs of a further economic weakening, the sources said.

As it happened, because the original deal was defeated, the promised initial rate cut also remains on hold. Its implementation likely will depend on how close the terms of any future deal are to the defeated measure.

With consumer and business confidence slumping and with higher oil prices cutting into spending power, the FOMC members doubted that lower short-term interest rates would actually give the economy much of an immediate boost. On the other hand, pushing more money into the nation's banking system at this point could worsen inflation later.

Most of the committee expressed concern that a poorly timed cut could backfire if it increased investor worries about future inflation.

If inflation expectations rose, long-term interest rates -- which affect such key sectors as housing and business investment -- likely would go up. The Fed has little control over these rates.

The committee majority, deeply concerned about an inflation rate that appeared to have been headed well above 5 percent even before the Iraqi invasion of Kuwait, does not want to pump so much money into the economy that escalating oil prices begin to spread into the economy, inflating wages and prices of other goods, the sources said.

Several members of the committee questioned whether it would be appropriate to try to use monetary policy to try to offset the economic impact of a classic supply shock -- an actual or feared shortage of oil -- to the economy.

For one thing, the group argued, the full impact of earlier cuts in short-term rates, some of which are nearly 2 percentage points lower than they were in the spring of 1988, has yet to show up in the economy. The Fed last cut rates by a quarter of a point in mid-July.

Other members were also worried that a drop in rates could further undermine the value of the dollar, which this week fell to a record low compared with the German mark and is down more than 15 percent in recent months against the Japanese yen. A cheaper dollar can help sales of U.S. goods and services abroad, but it also makes imported goods more expensive and can add to inflation.

Balanced against these views is the belief of many private economists that the economy is in a recession -- that is, that the nation's production of goods and services is declining significantly -- and that it will continue to decline for some time to come.

Most of the recession forecasters and many other economists who are predicting very weak growth but not an actual recession want the Fed to cut interest rates to boost the economy.

The day following the closed meeting, Greenspan endorsed the pending budget deal, saying it "appears to be a credible, enforceable reduction in the budget deficit, stretching over a number of years. ... Failure to enact the agreement would, in my estimation, be a grave mistake."

Members of the FOMC, who include Greenspan and the other five members of the Fed board as well as five presidents of regional Fed banks, did not believe that the deal would produce anything like the claimed cumulative $500 billion reduction in the deficit over the next five years, the sources said.

Too much of the savings appeared to be due to projections of rosy economic growth and falling inflation and interest rates in the later years. But committee members still felt that many of the spending cuts and tax and fee increases would help reduce future deficits significantly and therefore were prepared to cut rates once the package passed.