Federal Open Market Committee Ponders Interest Rate Hike

Federal Reserve policy-makers started a two-day meeting on Wednesday that markets expect will yield a quarter-percentage point rise in the overnight federal funds rate to 5.25 percent.

The Federal Open Market Committee began its meeting at 2 p.m. EDT, a Fed official said. The U.S. central bank is scheduled to announce its decision around 2:15 p.m. on Thursday.

That would be the 17th straight quarter-percentage point increase in the overnight fed funds rate in a campaign of rate hikes that began in June 2004.

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Interest rate futures indicate a small chance of a half-percentage point raise, and some analysts point out the Fed has ended several previous rate hike cycles with increases of that scale.

But with clear evidence of a slowing economy, many economists believe the odds of a half-point boost are slim.

Economists do expect language in the policy statement to express more concern over inflation, leaving the door open to another hike at the following meeting, on August 8, while acknowledging that growth has moderated in the second quarter.

"The risk of the Fed having to raise interest rates beyond 5.5 percent is rising," said Nariman Behravesh, chief economist for Global Insight in Lexington, Massachusetts.

While inflation is low, it is increasing and measures of inflation are above levels Fed officials have said they are comfortable with, Behravesh said.

In addition, the Fed's steady rate increases to date do not appear to have slowed the economy excessively, he said.