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Fed indicates that it will increase rates slowly this summer

Federal Reserve policy-makers left a key interest rate at a 46-year low but dropped their promise to be patient before they start raising rates.

Many economists saw the statement Tuesday by Federal Reserve Chairman Alan Greenspan and his colleagues as a strong signal that rates will start rising this summer.

Most analysts said they believed the Fed's first rate hike in more than four years will occur in August, although a minority said it could come as early as the Fed's next meeting in June.

"They are no longer signaling that they can stay on hold for a number of months," said Lynn Reaser of Banc of America Capital Management in St. Louis. "We will see an increase in interest rates sometime this summer."

All analysts said that any actual Fed rate increases will depend on how the economic data comes out over the next few months, particularly in terms of jobs.

Investors were heartened by the part of the Fed statement which said, "At this juncture, with inflation low and resource use slack, the committee believes that policy accommodation can be removed at a pace that is likely to be measured."

For the arcane world of Fed-speak, economists saw that sentence as remarkably straightforward.

"That is about as clear a statement as Greenspan could have put out," said David Wyss, chief economist at Standard & Poor's in New York. "He said, `We are going to raise rates and we are going to do it slowly.'"

The use of the world "measured" in describing future rate hikes marks the third change in this portion of the statement in recent months. From August through December, when weak job growth and worries about the remote risk of deflation predominated, the Fed promised to hold rates at a low level for "a considerable period."

That phrase was changed in the January and March statements to a pledge to "be patient" before starting to raise rates.

The Fed's latest statement struck a stronger tone about the economy, noting that economic output was continuing to expand at a "solid rate" and hiring "appears to have picked up."

While noting that certain measures of inflation have risen recently, the Fed said that "long-term inflation expectations appear to have remained well contained."

Analysts said the Fed was signaling that it was not yet worried about recent monthly inflation readings, which have come in higher than expected. Until recently the Fed was still concerned that inflation rates had fallen so low that there was a danger of deflation, or falling prices, something the country hasn't seen since the Great Depression.

The funds rate currently is at a 46-year low of 1 percent, where it has been since last June. Consumers and businesses have enjoyed a prolonged period of low borrowing costs as the Fed has battled to jump-start economic growth over the past three years.
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