Rate bump expected as economy gains steam

Monday, Aug. 8, 2005 | 9:10 a.m.

WASHINGTON -- The Federal Reserve is expected to raise short-term interest rates by a quarter point to 3.5 percent when it meets Tuesday, aiming to keep inflation under wraps as the economy strengthens.

Economists expect the Fed's policymaking Federal Open Market Committee, which has been raising rates in quarter-point increments for more than a year, to continue its campaign until its target for short-term rates is 4 percent or higher.

Friday's unemployment report, showing U.S. businesses created 207,000 jobs in July while wages posted their biggest gain in a year, appeared to bolster the Fed's argument that higher rates are needed as a buffer against inflation.

"It'll be onward and upward for the Fed's tightening cycle," says Rich Yamarone of Argus Investments, who expects the central bank to raise short-term rates to 4.5 percent by the end of the year, and possibly into 2006.

Yamarone beefed up his growth estimate for the second half to a 3.9 percent annual pace from 2.9 percent, though that was based more on other economic data than the job gains. Other economists also expect faster growth.

The central bank has increased rates nine times since June 2004 when they stood at a low of 1 percent. During that time, the Fed has been criticized for going both too slow and too fast, but central bank officials appear satisfied they are on target to reach their goal of sustainable growth and controlled inflation.