The move may be twinned with a similar-sized hike in the5.0 percent discount rate on direct Fed lending to banks. Financial markets are fully prepared for the well-telegraphed move. All 30 primary dealers of U.S. Government securities on Wall Street said in a Reuters poll the Fed was poised to raise borrowing costs by a quarter-point.

The Fed could surprise the Financial world if it decided the evidence for higher inflation was so compelling it needed a more drastic half-point rise in rates to slow the high-velocity U.S. Economy. But few expect that. The Fed has not moved the fed funds rate by 50 basis points in one step in five years. Though wage and price inflation, measured year-over-year,are still running at relatively moderate levels, there is evidence of an acceleration in the past few months.

The Consumer Price Index, the nation's main gauge of price pressures at the consumer level, was up 2.7 percent overall in 1999, boosted by higher oil prices and energy costs. That was the biggest rise since 1996. The Fed, however, prefers to look at the core rate, which excludes volatile food and energy prices. Core CPI ended the year up a non-threatening 1.9 percent. But two key inflation indicators released on Friday were certain to raise some eyebrows at the inflation-phobic Fed.

Inflation across all sectors of the economy, measured by the implicit price deflator in the gross domestic product report, rose 2.0 percent in the fourth quarter, almost double the rise in the previous quarter. Workers' pay and benefits increased a larger-than-expected1.1 percent in the fourth quarter, according to the government's Employment Cost Index data. The ECI saw the biggest quarterly jump in benefits costs since early 1993.

Finally, Fed officials frequently mention that a number oft emporary factors which conspired to keep U.S. Inflation low in the past few years are now heading in the opposite direction. Weakened economies in Asia are springing back to life, oil and commodity prices are gaining momentum and U.S. Health care costs are rising too.

One of the Fed's Chief concerns is an imbalance between supply and demand. Consumer demand is extraordinarily strong, but the workers needed to produce all the goods or provide all the service they demand are in increasingly short supply.