US Fed ready to raise interest rates to keep inflation at bay

US Federal Reserve officials are set to raise interest rates this week for the first time in four years - the first step in what…

US Federal Reserve officials are set to raise interest rates this week for the first time in four years - the first step in what they hope will be a "measured" campaign to keep inflation at bay as the economy strengthens.

The Fed's policy-setting Federal Open Market Committee (FOMC) meets tomorrow and Wednesday and is widely expected to raise overnight borrowing costs a modest quarter-percentage point from the current 46-year low of 1 per cent.

Analysts said the rate hike would probably have little impact on consumers, since an array of credit costs, including mortgages, have already moved higher in anticipation.

"I don't think there has ever been in US history a better advertised forthcoming rate increase," St Louis Fed president Mr William Poole said .

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While drama may be lacking about the rate move itself, suspense still reigns over what the Fed will say when it makes it and how aggressive the newly launched cycle will need to be.

After the last FOMC session in early May, officials said they thought they would be able to raise rates at a "measured" pace. Earlier this month, Fed chairman Mr Alan Greenspan said this was still the central bank's view.

Analysts have widely taken that to mean a protracted series of quarter-point moves.

The Fed nursed the economy through a recession and a slow recovery with cheap credit, cutting interest rates to a rock-bottom 1 per cent in 13 steps starting in January, 2001.

In a Reuters poll of 21 large bond firms that deal directly with the Fed, all said they expect the Fed to retain some version of this "measured" rate outlook in its post-meeting statement.

But a recent quickening in the pace of price increases in the economy did catch policy-makers off guard and has shaken their confidence in their low-inflation forecast.

While officials have argued the price pick-up should prove transitory, they have resolved publicly to take bolder action should they turn out to be wrong.

"The FOMC is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability so as to ensure maximum sustainable economic growth," Mr Greenspan has said.

Many Fed watchers expect the central bank to twin its "measured" language with a caveat that the actual pace of rate increases will depend on how economic events unfold."The statement this time will give them more flexibility and if the numbers keep looking worrisome, there will be a speech by Greenspan somewhere that indicates that this may not be enough," former Fed governor Mr Lyle Gramley said.

A number of Fed officials have argued that inflation is unlikely to stage a persistent rise until labour markets tighten and unused industrial capacity gets taken up.

While the US economy has been growing robustly since the middle of last year, hiring has only turned up decisively in the past few months.

Mr Gramley said there is some risk Fed officials are wrong, noting many US businesses say they can now push up prices to cover rising costs. He thinks the economic pace needs to cool a bit to keep inflation under wraps.

"I think they're going to have to recognise that the risks are a little bit more slanted toward higher inflation rather than lower inflation," he said, speaking of the so-called balance-of-risks assessment in the post-meeting statement. -