The Federal Reserve’s rate setters meet March 16, and observers will watch what they say, not what they do.

Everyone knows that the Fed’s Open Market Committee will leave short-term rates alone. The federal funds rate, also known as the overnight rate because it’s what banks charge one another for overnight loans, will remain 1 percent. The prime rate, which is set by banks, and moves in lockstep with the federal funds rate, will remain 4 percent.

Speculators at the Chicago Board of Trade have priced in a 100 percent chance that the Fed will maintain the federal funds rate at 1 percent. There might be a few lonely economists who believe that the Fed should raise the overnight rate, but even they don’t expect the Fed to follow their advice.

Short-term interest rates are especially firm in light of the February employment report, in which the Labor Department said that the U.S. economy created a net 21,000 jobs that month. Economists had expected an increase of about 125,000 jobs.

Not only did the report show weak job creation, but the new jobs were the wrong kind. Investors want to see job creation in the private sector. But the employment report suggested that the private sector created no net jobs in February; all 21,000 new jobs were created by state and local governments. All but 1,000 were employees of public school districts.

The labor force participation rate — the percentage of people age 16 and over who have jobs — has fallen to 65.9 percent. The last time it had been that low was September 1988. Three years ago the labor force participation rate was 67.1 percent, just short of the all-time high of 67.3 percent, set during three of the first four months of 2000.

With new job creation running far below the growth of the working-age population, workers are in no position to demand wage increases, and that keeps inflation down. The consumer price index was up 2.3 percent in 2003, and has slipped lower than that so far this year.

Economists say the Fed won’t raise short-term interest rates until it sees evidence of rising inflation. An increase in inflation is unlikely to happen until job creation picks up. When that February employment report showed such weak job growth, and none in the private sector, economists began saying immediately that a Fed rate increase had been pushed back several months.

“I can’t see that there’s going to be any inclination to move anytime until they see an economy that’s well established,” says Michael Carliner, economist for the National Association of Home Builders.

All along, Carliner and his colleagues had been expecting the Fed to wait until the end of the year to raise rates, “and we feel more confident that that’s true now.”

To demonstrate how important job-creation is to the Fed now, take another look at Carliner’s words: “until they see an economy that’s well established.” From the perspective of Carliner’s employer, the home builders association, the economy indeed is well established. Housing starts are galloping along; for five months in a row, housing starts have remained above an annual rate of 1.9 million units.

Productivity and gross domestic product are rising, corporations are posting profits, consumers and the federal government continue to borrow and spend at impressive levels. But job creation and inflation are stuck in low gear, and the Fed won’t ease up on the gas (by raising rates) until jobs and inflation shift into a higher gear.

The Fed’s rate-setting committee has another tool besides interest rates. It has a bully pulpit. Specifically, the statements it issues after its eight-times-a-year meetings. Those statements have been known to move interest rates for consumers, merely by the Fed’s perceived optimism or pessimism. Wall Street will closely scrutinize this statement.

Wayne Ayers, chief economist for FleetBoston Financial, observes in his weekly economics commentary that the chairman of the Fed, Alan Greenspan, said recently that the 1 percent overnight rate can’t last forever, and that it will have to be raised “at some point.”

“Though he once again gave no time frame for such action,” Ayers writes, “his remarks were enough to at least temporarily spook the markets and to fuel some fears that inflation would soon be back on the Fed’s radar screen.”

The remark that Ayers refers to was forgotten when the February employment report came out a few days later. If, in its after-meeting statement, the Fed reminds investors that low rates can’t last forever, the markets might be spooked again.

Greenspan suggested as such in a roundabout way on Thursday, during congressional testimony about the importance of having an educated workforce. “In all likelihood, employment will begin to increase more quickly before long as output continues to expand,” Greenspan said. Expect the rate-setting committee to repeat that note of optimism on March 16.