Fed set to again increase interest rates

WASHINGTON -- The Federal Reserve is expected to increase interest rates by a quarter of a percentage point, to 4.0 percent, when it holds its policy-setting meeting tomorrow.

The Federal Open Market Committee will issue its interest-rates decision at the end of the meeting, which will be the third from final gathering chaired by Alan Greenspan, who retires Jan. 31.

President Bush has named Ben Bernanke as the next Fed chairman, subject to Senate confirmation. Economists see the transition as another good reason to expect the US central bank to remain on the inflation offensive.

''We expect the 12th consecutive increase in the target fed funds rate, and really no change in the tactics deployed in recent meetings," said Lynn Reaser, chief economist at Bank of America Capital Management in Boston.

The Fed has done nothing to remove the market's impression that it still thinks rates are too low, or at least below neutral -- a theoretical description of a setting for a policy that neither stimulates nor hinders economic activity.

Fed policy makers are purposely vague about what level they consider neutral, and say that it can alter over time.

''The big question . . . is whether 'measured pace' disappears from the statement" accompanying the interest-rate decision, Goldman Sachs told clients in a note. ''Although this is possible, our best judgment is that the language stays, as the FOMC probably plans another hike on Dec. 13." The remaining two FOMC meetings of the Greenspan era are Dec. 13 and Jan. 31.

If there are tweaks to the statement, it will be on the unfolding economic outlook rather than a big signal on policy. ''The Fed is likely to acknowledge some dampening in growth from rising energy costs. But it will suggest the underlying economy is solid and although inflation has been in check recently, there are upside risks going forward," Reaser said.

Policy makers have also said they are committed to keeping inflation at bay amid soaring energy costs. Data on Friday showed underlying prices, which strip out energy and food costs, remain tame.