Fed Is Unlikely to Reverse Plans For Increasing Interest Rates; Inflation Worries Outweigh Concerns About Slowing Of Economic Expansion
WASHINGTON -- Despite signs the economic expansion is slowing, the Federal Reserve is unlikely to pull back from its campaign of regularly raising interest rates in the months ahead.</br></br>Fed officials say their main concern is that today's extremely low level of interest rates carries a high risk of fueling inflation years down the road, and that outweighs concerns about damping the expansion by gradually raising rates to a so-called neutral level of between 3% and 5%.</br></br>That perspective suggests the Fed is almost certain to raise its target for the federal-funds rate, charged on overnight loans between banks, to 1.5% from 1.25% on Tuesday. It also means that, barring a significant reversal in the economy, it likely will raise rates in September and at one or both of its meetings in November and December.</br></br>The decision may not seem straightforward. After all, economic growth slowed sharply to a 3% annual rate in the second quarter from 4.5% in the first quarter. Terrorism fears and tight global capacity also have pushed oil prices above $44 a barrel, a record, which could crimp consumer spending and confidence. Higher petroleum prices already are eroding stock values. Indeed, some Fed officials have trimmed their projections for economic growth in the second half of the year.</br></br>At the same time, the underlying rate of inflation, which by the Fed's preferred measure jumped from 1% last September to 1.6% in April, eased back to 1.5% in June, remaining within the Fed's informal 1% to 2% comfort zone.