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Fed gathers to plot course to best handle economy

Associated Press

WASHINGTON — Borrowing costs are likely to hold steady as the Federal Reserve tries to avoid both stirring inflation and stifling a fragile economy.

Fed Chairman Ben Bernanke and his colleagues opened a two-day meeting Tuesday afternoon, where they will put together their most up-to-date assessment of the economy’s outlook and decide the best course on interest rates.

The Fed is almost certain to hold its key interest rate steady at 2 percent when it wraps up its session on Wednesday. If that’s the case, the prime lending rate for millions of consumers and businesses would stay at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans.

Looking ahead, the Fed probably will go further in highlighting inflation risks but won’t go as far as to signal a rate increase at the Fed’s next meeting on Aug. 5, analysts said.

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However, if energy and food prices do show signs of spreading inflation through the economy, a rate increase at that time or later this year can’t be ruled out, they said. Some Wall Street investors are betting that will be the case.

Given the shaky economy, the deep housing slump and record-high home foreclosures, many economists believe the Fed would prefer to leave rates where they are through the rest of this year and then begin to boost them in 2009.

Fed policymakers face tough choices. There have been signs of divisions within their ranks about the best way to handle the economy. Boosting rates too soon to fend off inflation will hurt economic growth. On the other hand, Fed officials have made clear they aren’t inclined to cut rates again for fear of aggravating inflation.

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