Economists and market observers say the Federal Reserve is all but certain to take steps to raise interest rates when it meets Tuesday and Wednesday.

“It’s a 99 percent probability they will raise rates,” said Al Kugel, chief investment strategist with Stein Roe Investment Counsel. He, like most other Fed observers, is expecting an increase to 1.25 percent from 1 percent, a 46-year low.

The bigger question, Kugel said, is how much higher rates will go through the rest of the year.

“Greenspan talks about a measured increase, and it will probably run for the next 12 months or longer,” Kugel said.

Last weekend, Alan Greenspan was sworn in for his fifth term as Fed chairman. In the past, Greenspan has implemented repeated but rather small changes in interest rates, both up and down, rather than opting for one or two big moves.

Kugel expects that to continue, with the Fed perhaps raising rates by 0.50 percent once or twice.

The Fed moves interest rates down to stimulate the economy, as was the case during the recession at the beginning of this decade, or up to curtail spending and fend off inflation, as was the case in the mid-1990s.

“Inflation is perking up gradually,” Kugel said, and wages appear to be rising as well after years of stagnation. That is a recipe for the Fed to start cooking. Rising interest rates typically are no friend of stocks, and can be toxic for bond prices.

Businesses find it more expensive to borrow for expansion. When rates get high enough, consumers cut back on borrowing, and that crimps the demand for goods and services, further hurting companies.

But some who observe investor behavior said higher interest rates are already factored into stock prices, meaning no turmoil is likely in the exchanges this week.

“This has been priced into the market for more than a month,” said William Hummer, chief economist with Wayne Hummer Investments. “I think the market has discounted” a rate increase.

Hummer said he expects a bit of reassurance from the Fed. The statement “will play down any imminent inflation threat,” he said.

Fed Governor Ben Bernanke said in a speech that he isn’t anticipating an outbreak of higher prices.

“The most likely case for the rest of the year is that core inflation will stabilize in the region, with which I’m comfortable,” he said.

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(c) 2004, Chicago Tribune.

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AP-NY-06-25-04 1307EDT