The Federal Reserve is expected to lift interest rates again this week to 5.25 percent in its seventeenth straight quarter percentage point hike and signal that further increases may be needed to keep inflation at bay.
The US central bank meets over two days and is scheduled to announce the decision around 2:15 pm (1815 GMT) on Thursday.
Interest rate futures even indicate a small chance of a 50 basis point move, and some analysts point out the Fed has ended several previous rate hike cycles with increases of that scale. But the odds look slim this time around.
"When there are very clear signs the economy is slowing, the stock market is soggy and the 10-year Treasury (yield) is at 5.20 percent, to pick up a hammer and hit the economy in the head with 50 basis points? That to me is not likely at all," said former Fed Governor Lyle Gramley. But economists do expect language in the policy statement to express more concern over inflation, leaving the door open to another hike at the following meeting, on August 8, while acknowledging that growth has moderated in the second quarter.
"They won't put rates on hold without clear evidence that growth is slowing in the second half, and we don't think that they will see that evidence," said Dean Maki, chief US economist at Barclays Capital in New York. "The message will continue to be that they may need to do more," he said.
Barclays Capital has lifted to 6.0 percent from 5.5 percent its forecast for the peak in Fed benchmark rates after revising its inflation estimates higher. Core inflation, which strips out volatile food and energy prices to provide a clearer picture of the underlying price trend, rose a faster-than-expected 0.3 percent in May and at a 2.4 percent pace year-on-year.
This worried Fed Chairman Ben Bernanke, who warned on June 5 that some price measures may already have breached levels that many economists, including himself, see as acceptable.
Other Fed officials echoed this sentiment, hardening views they will lift rates again in August, to 5.5 percent. As a result, economists expect the key forward-looking sentence in the Federal Open Market Committee's statement to remain unchanged in the judgement that "some policy firming may yet be needed to address inflation risks."