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. Last Updated: 07/27/2016

Bernanke's Fed Set to Raise Rates

WASHINGTON -- U.S. Federal Reserve Chairman Ben Bernanke leads his first policy meeting this week, one all but certain to end with another U.S. interest-rate increase and perhaps a suggestion a 21-month run of credit-tightening is almost over.

Analysts expect the Federal Open Market Committee, gathering in Washington on Monday and Tuesday, to lift the benchmark federal funds rate to 4.75 percent.

This would mark a 15th straight quarter-point hike since June 2004, when the U.S. central bank began a gradual campaign to boost interest rates from an ultra-low 1.0 percent to keep inflation from flaring up.

Policymakers may also tweak their accompanying policy statement, due Tuesday afternoon, to signal a halt in rate hikes around mid-year, some economists say.

Some analysts fear the cumulative increase in borrowing costs is already weighing on the U.S. economy and that Tuesday's hike would be the last in the campaign.

"I think that we are very close to seeing the end," said Lynn Reaser, chief economist at Bank of America Capital Management in Boston.

But market players see a bit more ahead. Financial futures prices show a better-than-even chance of a federal funds rate of 5.0 percent by May and give even shorter odds of rates at this level by July.

Either way, the cycle looks nearly done.

"They are likely to acknowledge the firmer [economic] data since the January meeting. ... If they only do that, it's likely to be taken as a pretty hawkish statement," said Dean Maki, chief US economist at Barclays Capital in New York.

"I think that they are likely to make some small modification to the forward-looking language ... saying something like 'further policy firming might be needed' rather than 'may be needed,'" Maki said.

He said this would indicate the Fed was pondering a pause in rate increases in the second quarter.

U.S. economic growth is on track for a thumping performance in the first quarter of the year. But softer-than-expected new-home sales in February point to weakness in the second half.

This echoes the forecast of Fed staff economists for growth to moderate in the second half as the housing market cools.

Such a development could secure a rare soft landing for an economy that has survived many challenges since the technology bubble burst in 2001, including the Sept. 11 attacks and the devastation of Hurricane Katrina.

"The Fed definitely wants the economy to slow. What's going on in the housing market now suggests that close to enough may have been done so that the Fed really doesn't have to pound the economy over the head," said former Fed Chairman Lyle Gramley.

He expected no change to the policy statement and said he thought the Fed would pause at 5.0 percent at its next meeting, on May 10, provided there were no surprises from data signaling growth was not slackening as predicted.

Economists see Bernanke, who has pledged continuity with Greenspan's policy legacy, making his mark with a more collegial approach than Greenspan, who some felt consciously steered the committee toward the outcome he favored. Still, economists thought the newcomer would ensure his voice was heard.

"He will let a committee decision take place, so long as it is going in the direction he thinks is appropriate," Gramley said.