An apparent slowdown in the economy and record high oil prices aren't expected to stop the

Federal Reserve

from raising interest rates on Tuesday for a second time this year.

After a much weaker-than-expected jobs report Friday and signs of a deceleration in economic growth, two rate hikes in six weeks might seem excessive -- but many economists say it isn't.

"Fed funds are so far below nominal GDP growth, it just means policy is ridiculously easy," said Doug Porter, an economist at BMO Nesbitt Burns. "The Fed is well advised to start unwinding some of that stimulus."

Traders expect the central bank to raise its target rate by a quarter-point on Tuesday. The fed funds rate is currently sitting near a 45-year low of 1.25%.

Still, the case for tightening rates aggressively, or in fact tightening rates at all, has taken a serious blow recently, and the latest economic developments could prompt Fed officials to issue a dovish statement after its policy meeting this week.

Of course, Fed Chief Alan Greenspan must walk a fine line. In congressional testimony last month, he said the soft patch in June would prove to be "short-lived" and noted that the economy has produced "notable gains in employment."

A reversal of that stance could damage his credibility. At the same time, however, Greenspan must acknowledge that the weakness in June has continued into July.

Michael Panzner, vice president of equities at HSBC Securities, said the Fed has painted itself into a corner. By saying the economy is in good shape and that interest rates must return to historical norms, the central bank "has effectively limited its ability to respond to new developments -- however necessary that might be."

Since May, the Fed has been saying that it intends to raise rates "at a pace that is likely to be measured," citing an improvement in hiring and solid economic growth. Even as the economy showed signs of slowing in June, Greenspan held onto this optimistic view, saying consumer spending had been hurt by "transitory" factors like high oil prices.

But energy costs have climbed further since then, recently hitting record highs. More significantly, the pace of job growth has slowed significantly, with just 32,000 new jobs created in July. Downward revisions to both May and June payrolls are also disconcerting. Meanwhile, real wage growth has been falling at a time when tax relief has been fading and interest rates have gone up.

Consumer spending, which accounts for two-thirds of economic growth, has been hit hard as a result. In the second quarter, spending rose just 1%, the weakest pace in three years, and the trend has apparently continued into the third quarter.

Same-store sales showed only a small improvement in July from the prior month, according to the International Council of Shopping Centers. And both

General Motors

(GM) - Get Report

and

Ford

(F) - Get Report

saw car sales decline from last year despite offering heavy incentives.

"There's no doubt that consumer spending has an uphill climb here," said Porter. "I think the consumer will continue to contribute to the expansion, it just won't be able to carry the burden as it did over the past couple of years."

Porter believes that business spending and rising inventories will make up for a more sluggish pace of consumer spending in the second half of the year. But with profits apparently peaking, it's questionable just how much capital investment will increase. In addition, inventories are already quite high, particularly among automakers.

The Federal Reserve has said it expects the economy to grow about 5% in the third and fourth quarters, but that estimate is looking increasingly unrealistic. The economy expanded just 3% in the second quarter after growing 4.5% in the first three months of the year.

One of Greenspan's big concerns in July was that unit labor costs have started to inch up this year, possibly contributing to inflation. Still, the latest jobs report shows plenty of slack in the labor market. In addition, the Fed's preferred gauge of inflation, the core personal consumption expenditure index -- which excludes food and energy -- increased just 1.8% in the second quarter, down from 2.1% in the prior quarter.

While high energy costs could certainly contribute to inflation going forward, the Fed has shown in the past that it is more concerned about the impact oil can have on growth, than on overall price levels.

Before Friday's jobs report, fed funds futures contracts had been factoring in three rate hikes this year with a strong possibility for a fourth. Today, the futures market is pricing in two more hikes, and a 68% chance of a third.

If the Fed tries to rein in expectations for rate hikes this year, Panzner said it risks "creating the unsettling impression that conditions are much worse than what they have been acknowledging."

On the other hand, if the central bank continues on its mission to raise rates, Panzner said there is a good chance it could exacerbate the downdraft that might now be unfolding. "The Fed risks losing face, or otherwise being seen as out of touch with what is going on," he said.

Howard Simons, a contributor to

TheStreet.com's

sister site

RealMoney

, said the Fed's credibility would be "shot" if it refused to raise rates based on the July employment report.

"They have so prepped the market for a gradual rise in rates that a failure to follow through will be taken as evidence of real underlying weakness," he wrote.

Still, he noted that a string of rate hikes this year would carry some big risks. "A funds rate of 1.50% instead of 1.25% is no big deal, but there are a lot of warnings out there that things are just not right," he said.