Despite the slowdown in the U.S. economy during the first quarter of this year, the Federal Open Market Committee (FOMC), the Federal Reserve's interest rate-setting panel, is likely to raises the federal funds target rate to 3% when it meets on May 3. The federal funds rate is the interest that banks charge each other on overnight loans, and the FOMC has steadily been raising the target since last June. The funds target rate is now at 2.75%.
Why tighten the money supply again? "In our view, the Fed sees the recent stream of weak numbers as a temporary soft patch and so expects growth to re-accelerate to [an annual rate of] 4% in the second half of the year," says Merrill Lynch & Co., New York.
Indeed, Merrill continues to predict that the FOMC will raise rates three times between now and the end of this summer.