As Fed meets, it edges toward first rate increase since 2006

WASHINGTON (AP) – The Federal Reserve (Fed) is getting close to raising interest rates for the first time in nearly a decade, perhaps in September. When it meets this week, though, don't expect any timetable for a rate hike to be spelled out in a postmeeting statement. For now, the Fed wants to keep its options open.

Yet Chair Janet Yellen has left little doubt that the Fed is preparing to raise short-term rates by year's end from the record lows the central bank set at the depths of the 2008 financial crisis. With the US economy and job market now steadily rising, the need for ultra-low rates to stimulate growth is fading.

“Our economy is in a much better state,'' Yellen told Congress earlier this month. “We're close to where we want to be, and we now think the economy can not only tolerate but needs higher rates.''

The economy still faces an array of threats, from subpar US manufacturing and business investment to troubles in Europe and Asia, which have roiled financial markets. Inflation also remains below the Fed's target rate. And while the unemployment rate, at 5.3 percent, is nearly normal, other gauges of the job market remain less than healthy. Pay growth remains generally sluggish, for example, and many people are working part time because they can't find full-time jobs.

But Yellen has stressed that when the Fed begins to raise rates, it will do so only gradually. The idea is to avoid weakening an economy that's still benefiting from low borrowing rates resulting from the Fed's policies.

Yellen has suggested that raising rates in small increments, followed by pauses, would let the Fed assess the effects of slightly higher rates. Higher rates would also allow the Fed to respond later to any weakening of the economy by cutting rates again.

Though many economists foresee the first rate hike in September, when Yellen is scheduled to hold a news conference, others think the Fed might wait until December. On Wednesday, after its latest meeting ends, the Fed will issue only a statement.

“The recent volatility in the global economy and financial markets has given the Fed pause,'' said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, Channel Islands. “I think the probability of a rate hike in September has diminished because the Fed is going to need more time to evaluate how the US economy is doing. December looks like a good possibility.''