By Martin Crutsinger
The Associated Press

WASHINGTON - A key short-term interest rate is at a 45-year low, and Federal Reserve policy-makers are expected to keep it there when they meet Tuesday.

Fed officials, however, will certainly spend time discussing what, if anything, they can do to stop long-term rates from rising and derailing the economy.

Only this spring did Federal Reserve Chairman Alan Greenspan and his colleagues draw praise for cleverly manipulating market expectations with talk of deflation, which is a sustained fall in prices. Now, they are criticized for misleading the bond market and causing a big run-up in long-term rates.

For that reason, many analysts see the Fed meeting as an opportunity for the central bank to calm the jittery bond market.

"We are facing a dangerous situation with the threat that interest rates will go up so fast that it will choke off the recovery," said economist David Jones. "The Fed has to state more clearly what its intentions are."

At its last meeting, the central bank reduced its target for the federal funds rate, the interest that banks charge each other on overnight loans, by one-quarter of a percentage point, to 1 percent, the lowest since July 1958.

In response, commercial banks dropped the prime rate to 4 percent.

But rates on longer-term loans actually rose after the Fed's action. The bond market was disappointed that policy-makers had not moved more boldly.

A Fed statement after its May 6 meeting cited that threat, leading to a sharp rally in the bond market that drove long-term interest rates to the lowest levels in decades.

The Treasury's 10-year note, a determining factor in mortgage rates, fell to 3.1 percent in June and 30-year mortgages dipped to 5.21 percent, rates unseen in more than four decades.

Since then, long-term rates have climbed. The 10-year Treasury reached 4.41 percent on Aug. 1; last week, rates on 30-year mortgages stood at 6.43 percent.