Fed Expected to Raise Rates Another 1/4 Point

The Federal Open Market Committee (search), the rate setting-panel for the Federal Reserve, was widely expected to raise interest rates by a quarter-percentage point as it began its second meeting of the year on Tuesday.

The FOMC is expected at about 2:15 p.m. EST to announce another quarter-percentage point rise in the bellwether federal funds rate (search) — to 2.75 percent.

"I don't see any real reason why they would make any radical changes right now," said Paul Kasriel, chief economist at Northern Trust Co.

With a rate hike, which would be the seventh straight quarter-percentage point increase, is seen as virtually a done deal, financial market interest hinges on the language the Fed uses to explain its action.

The Fed, after each meeting, issues a brief statement that usually provides an explanation of a given interest rate decision as well as some thoughts on the economy. Fed watchers examine the statement for hints about future monetary policy.

The question is whether policy-makers are considering scrapping a forward-looking pledge to keep raising rates only at a "measured" pace — wording adopted in May and taken as meaning modest quarter-point rises.

Speculation that the Fed might drop its pledge to move rates at a "measured" pace was sparked last month when Fed Chairman Alan Greenspan (search) in congressional testimony did not use the word "measured" to describe the Fed's future intentions.

"The Fed is getting a little worried about inflation," said David Wyss, chief economist at Standard & Poor's in New York.

Some analysts said the Fed might modify the pledge to raise rates at a "measured" pace by adding some sort of qualifying phrase that would signal that the central bank was poised to start raising rates more quickly.

"Right now the economy is moving at a very good clip. If this continues, then the Fed will have to get more aggressive," said Lyle Gramley, a former Fed board member and now senior economic adviser at Schwab Washington Research Group.

Especially of interest to economists is whether the Fed will stick with its current stance that future rate increases will be gradual. Since May 2004, the Fed's statements have said rates can rise "at a pace that is likely to be measured." Measured has come to be viewed as quarter-point bump ups.

Some economists think that language will be kept — for now, anyway. A few believe it could be dropped at Tuesday's meeting. If the "measured" phrase were abandoned altogether, it could mean future interest rate increases might be less predictable than they have been, economists said.

To be sure, how economic activity and inflation unfold in the months ahead will figure prominently into whether the Fed speeds up or slows down its rate-raising campaign, analysts said.

Some economists predict the Fed will follow Tuesday's expected rate increase with quarter-point boosts at both the May and June meetings, which would leave the funds rate at 3.25 percent. Then the Fed would pause and take a wait-and-see attitude toward any further moves, some economists said.

Others, however, believe the Fed will keep lifting the funds rate through much of this year, pushing the rate up to around 4 percent.

The funds rate is the interest banks charge each other on overnight loans and is the Fed's main tool for influencing the economy.

The funds rate moves in lockstep with commercial banks' prime lending rate, which is used for many short-term consumer and business loans. The prime rate, now at 5.50 percent, would climb to 5.75 percent if the Fed pushes the funds rate up by one-quarter point Tuesday.

The Fed is lifting rates as energy prices are surging again. Oil prices, which set a new record high last week, briefly skyrocketed above $57 a barrel in trading Monday. That's helping to propel gasoline prices sharply higher.

The economy, which grew at a solid 3.8 percent annual rate in the final quarter of 2004, is expected to do as well or better in the current quarter, analysts predict. But high energy prices may pose a risk to these projections as well as to the nation's gradually improving employment climate, they warned.

Employers added 262,000 jobs in February, the most since October. Economists are hopeful payrolls will post sizable gains in the coming months, but that may not occur if energy prices continue to surge, they said.

Reuters and the Associated Press contributed to this report.