Washington, DC, June 24--Next week, the Federal Reserve is likely to end the easiest monetary policy in its modern history by raising interest rates for the first time in four years. And if all goes according to plan, the markets will barely blink.
Fed officials are almost certain to boost their target for the federal-funds rate, charged on overnight loans between banks, to 1.25% from 1%, when their two-day meeting ends Wednesday afternoon. They have labored for nearly a year to ensure that this increase, and those to follow, are fully anticipated. The approach reflects a tactical shift to an innovative communications strategy that is aimed at incrementally guiding markets toward the inevitable rate boost.
There may yet be surprises next week. Fed officials are wrestling with whether to indicate, as they did after their May meeting, that future rate increases will be "measured," a euphemism for moving in quarter-percentage-point increments. Some officials, mostly hawkish reserve bank presidents, see the risk of inflation accelerating and think the "measured" language limits their ability to raise rates faster if needed. More dovish officials argue that the term still reflects their likeliest course of action and that they can change their words quickly if inflation does pick up. The latter view likely will prevail, though the Fed may make it more explicit that the measured pace will be dropped if inflation risks rise.
Some analysts, citing mounting reports of rising prices, say the Fed has waited too long to raise its rates. But Fed officials note that the mere anticipation of a rate increase has had the practical effect of an actual increase. Long-term interest rates, including those on mortgages, are up sharply since March, driving down new mortgage applications. Higher borrowing costs will restrain spending and inflation pressure.
