Fed is set to raise rates this week despite political tumult

While Wall Street's top firms widely expect the Fed to raise rates one more time before the end of 2017 after Wednesday, they are split on whether it would happen in September or December, a Reuters poll conducted on June 2 showed. They view weak first quarter growth as transitory and believe inflation will resume rising toward the central bank's 2% target.

The FOMC's median projections of the fed funds rate at the end of this year and the next are not expected to change, in line with three rate hikes both in 2017 and 2018, consistent with the recent projection from March.

Economists J. Bradford DeLong said the Fed has overestimated the economy for 11 years in a row, making them less reliable than a coin toss.

Some economists, however, said the economy can tolerate higher rates, as they remain low by historical standards.

The Federal Open Market Committee, the monetary policy arm of the central bank, will convene for its two-day meeting on Tuesday, culminating in an announcement on Wednesday afternoon. The central bank will also release updated economic forecasts and Fed chair Janet Yellen will hold a press conference. This would be the third Fed interest rate hike in seven months. "With the United Kingdom event risk successfully negotiated, it would appear the market is putting more emphasis on this week's FOMC (Federal Open Market Committee) rate hike", said Jeffrey Halley, a senior market analyst with OANDA, adding that markets had priced in an nearly 100 percent chance the Fed would lift rates.




Progress with plans to trim the Fed's $4.2 trillion balance sheet will also come into focus.

"They seem to be more committed to just getting back to some version of normal than following the numbers", said Mr Jared Bernstein, economic advisor to former vice-president Joe Biden. But the market has its doubts, with traders putting only a 23% chance of a move at that meeting.

"Even though the soft inflation may give the Fed pause, the significant easing in financial conditions gives them more room to continue to "tighten" policy", Levy wrote in a research note.

Another rise in interest rates on Wednesday at 7pm United Kingdom time would represent only the fourth upwards move in the federal funds rate since before the financial crisis, as the world's most important central bank takes a cautious approach to the "normalisation" of monetary policy.

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