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ECONOMICS REPORT - U.S. Interest Rates Expected to Rise at the End of June - 2004-06-18

Broadcast: June 18, 2004

This is Steve Ember with the VOA Special English Economics Report.

Financial markets are preparing for something that has not happened since May of two-thousand. The United States central bank, the Federal Reserve, is expected to raise interest rates at the end of this month.

Interest is the cost to borrow money. As the cost increases, people generally borrow and spend less. Less spending means less demand. And that generally keeps prices from rising. So economists say interest rates are an important tool to fight inflation.

Last week, Federal Reserve Chairman Alan Greenspan said the central bank "will do what is required" to keep prices under control. This is known as price stability.

Later, the president of the Federal Reserve Bank of Cleveland said current interest rates are too low. Sandra Pianalto said inflation pressures appear reasonably under control right now. But she added that she is concerned that they could increase.

Another Federal Reserve Bank president warned that recent price increases must be watched closely to see how much is temporary. Jack Guynn in Atlanta said Federal Reserve policymakers need to react to whatever happens.

The policymakers said in May that rate increases are likely to come at a "measured" speed. But Mister Greenspan says they are prepared to act more quickly if needed.

The Federal Reserve lends money to other banks at a rate set by the system’s Open Market Committee. The federal funds rate is currently one percent, the lowest since nineteen-fifty-eight. This is not the rate for individual borrowers, however. Banks borrow from the Federal Reserve so they can then lend money to businesses, individuals and each other.

Low interest rates have led to record numbers of home sales in recent years. Now, interest rates for home loans are increasing.

Economists say they are concerned that growth in jobs, high energy prices and increased demand in the economy will push prices up. The government says prices rose at a yearly rate of four-point-four percent in the first four months of this year. For all of last year, the inflation rate was less than two percent.

The Federal Open Market Committee will meet in Washington for two days, starting June twenty-ninth. The committee is expected to raise the federal funds rate from one percent to one-point-two-five percent.

This VOA Special English Economics Report was written by Mario Ritter. This is Steve Ember.