When the U.S. Federal Reserve Board meets this Tuesday, many observers expect it to cut interest rates for the fifth time since January. If it does, the Fed's retreat from the "new economy" dogma will be complete. The central bank had long believed that Information Age miracles guaranteed U.S. prosperity. It initially raised rates to restrain the worst of the stock markets' excesses. When this mild medicine abruptly threw the economy for a loop, the Fed frantically reversed course in favor of a decidedly old-fashioned, but far more effective strategy: Use cheap money to reinflate the bubble.

The Fed's unhappy experience provides a near-perfect test of competing theories about recent U.S. economic success. The most heavily advanced view is that new-age communications, like the Internet, transformed America into a super-efficient, perpetual wealth-creating machine. Blessed with such new capabilities, America enjoyed an inflation-free, effortless expansion in the 1990s, one marked by gas-guzzling behemoths, homes stuffed with electrical gizmos, a negative savings rate and a seemingly unending employment-wanted market just a double-click away.

The other, less glamorous theory attributes the boom to record-low interest rates, remarkably stable energy prices and bargain-basement import prices. In fact, U.S. short-term interest rates were below 4% in the 1990s, a level not achieved since 1963. Even when they peaked in March 2000, U.S. rates were still lower than in most every previous year since 1973. Such a steady diet of cheap money encouraged spending and devalued traditional savings. Cheap imports and relatively low energy prices allowed consumption to rise without triggering inflation. Import-dependent U.S. producers, like computer and car makers, assembled their products with low-priced but high-quality components and chalked up their profit margins to Information Age magic.

The Fed's rate hikes put these views to the acid test. From November 1998 to May 2000, the benchmark federal funds rate rose from about 4.7% to 6.5%. If the new-economy theory was correct, such tightening might take the punch out of the nation's more speculative investments, like dot-com stocks, but its newly invigorated and productive economy should be largely unaffected. If a cheap-money addiction was really powering America's economic resurgence, however, even modest rate hikes could prove to be devastating.

By the fourth quarter of 2000, the results of the Fed's experiment were in. Cheap money, not Web browsers, was behind the U.S. boom.

The Fed, to be sure, deflated "spec-tech" stocks. But no one anticipated that a collective federal-funds hike of 1.8% would almost instantly strip trillions of dollars from U.S. stock portfolios and cause the high-flying Nasdaq to fall by more than 70%, one of the most stunning stock-market collapses ever. Worse still, the nation's annual growth rate plunged by 87%, from 8.25% in the fourth quarter of 1999 to an anemic 1.04% a year later. Sales and consumption dropped by greater than 75%, exports retrenched and industrial production turned sharply negative over the same period.

Internet and related companies, including Dell Computer Corp. and Lucent Technologies Inc., were unaccountably hit hardest by the Fed's policy. Last Wednesday, Cisco Systems Inc., the bellwether of the new economy, reported a once-unthinkable 30% quarterly drop in its business and a multibillion-dollar loss; it will cut 8,500 jobs. Fueled by new-economy cutbacks, 223,000 workers were stripped from U.S. payrolls in April 2001 alone. The nation's unemployment rate rose for the first time in years.

Perhaps the most telling result was the rapid erosion of U.S. productivity gains, the amount of goods and services U.S. companies produce compared with their labor and other input costs. After registering impressive increases during the 1990s' boom, non-farm business productivity fell by more than 70% in 1999-2000. Just last week, the government announced that U.S. productivity growth turned negative last quarter for the first time since 1995.

Confronted with evidence of mounting economic carnage, the Fed started slashing rates in January and has cut them by more than 30% since then. If it approves another half-a-percent rate drop Tuesday, short-term rates will have dropped by nearly 50% in just five months, one of the most rapid declines in the last century.

Having unintentionally exposed the limitations of the new-economy myth, the Fed now seems to be trying to re-create the conditions that fostered the tech-stock bubble in the first place. Can it use interest-rate policies to reconstruct the delicate system of inflation-free consumption, huge imports and cheap energy that generated U.S. prosperity?

Despite some encouraging signs, reinflating the bubble economy won't be as easy this time.

One problem is whether the Fed has enough room to cut rates sufficiently to reignite rapid growth. The discount rate is near its decades-long low of 3.5%, achieved in May 1994, when the Fed was still fighting the early 1990s' recession. Yet, poor earnings reports and layoffs persist. What happens if rates have to be cut below that level?

Japan faced precisely this question in the late 1980s when its bubble economy burst. Although it dropped rates to below 0%--essentially subsidized money--it failed to rekindle growth and found itself out of attractive options.

The U.S. has not faced this kind of situation in recent times. As the Fed has eased rates, U.S. annual growth has slightly risen in 2001, and stocks have come off their recent lows. These positive trends will have to markedly strengthen in short order to avoid the Japanese interest-rate trap.

A second concern is maintaining America's trade imbalance. The U.S. has been gorging itself on inexpensive, high-quality imports, especially from financially troubled Asian producers. Its annual trade deficit exploded from about $100 billion in 1997--a record then--to $400 billion, about 4% of total gross domestic product.

A deficit of this magnitude used to spark considerable alarm. Disruptions of component supplies or cost volatility could harm import-dependent U.S. production. Paying a huge import tab without earning roughly comparable amounts from exports would trigger capital outflows, pressure credit and money markets, and generate higher interest rates and inflation.

None of this mattered much in the 1990s. Worldwide manufacturing overcapacity and the Asian fiscal crisis pushed import prices downward. More fortuitously, U.S. trading partners eagerly repatriated much of their earnings by buying U.S. government securities and other dollar-denominated investments. Global traders were financing U.S. consumption much like a furniture store might stimulate sales with no-interest loans or rebates.

Can this happy circumstance continue? If protests against globalism or political disagreements like the recent U.S.-China tiff begin to affect import prices, or U.S. trading partners invest their dollars in another currency, the results could be as harmful as interest-rate hikes. As the U.S. trade deficit grows, its potential to spark rapid, unexpected economic disruption will continue to increase beyond similar risks in the 1990s.

Then there's the growing concern over energy costs. Prices for electricity, refined fuel and natural gas are all more volatile, and trending upward. California, 10% of the nation's economy, is subject to random power blackouts. Resurgent Middle East conflicts may again inflame anti-U.S. sentiments among major oil exporters.

Uncertain energy supplies can undo much of the benefits associated with lower interest rates. The productive investments that cheap money might otherwise foster would be diverted to pay for heating, gasoline or electricity. This feeds inflation and reduces productivity.

Energy shortages and shortfalls also undermine consumer and business confidence. The 1990s' economy took off when Americans felt so secure about energy that they ignored the potentially adverse consequences of their energy inefficiency. Should that conviction evaporate, energy anxieties may dictate more cautious consumer and business spending patterns.

The Fed is plainly hoping that low interest rates, a painless trade deficit and stable energy supplies will once again come together in Bubble Economy II. More than one movie mogul has sadly discovered, however, that making a sequel is far more difficult than producing the original.