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Investors Watch as US Fed Ponders Interest Rates

FILE - Federal Reserve Chairman Janet Yellen speaks during a conference on economic opportunity at the Federal Reserve Bank in Boston.

Top officials of the U.S. central bank are debating how soon and how much to raise the key interest rate. The U.S. Federal Reserve cut short-term interest rates to nearly zero during the recession to bolster economic growth.

Low interest rates make it less expensive for businesses to borrow the money needed to buy new equipment to expand and hire more workers. It also makes it easier for consumers to spend, and consumer demand drives most U.S. economic activity.

Rising economic growth and falling unemployment show that such stimulus may no longer be needed.

Hiring plans

Researcher Chris Layden of Experis, part of the Manpower Group of companies, said a recent survey of thousands of employers across the country shows rising demand for goods and services, which is prompting many companies to plan to hire workers over the next several months.

“For some time we have seen incremental increase in demand for goods and services, and that we think, is going to drive hiring intentions higher in the coming quarter, the second quarter [April, May, June] of 2015. We are seeing that increase across all 13 industry sectors and really across all regions of the U.S.," said Layden.

The Fed's job is to manage the economy to encourage full employment and stable prices.

So the Fed must keep rates low long enough to bolster growth, jobs and to raise inflation closer to the two-percent annual rate many experts say is healthy for the economy.

'Patience' and inflation

In a Skype interview, PNC Bank economist Gus Faucher said rising wages in some areas could foreshadow rising inflation.

“Businesses are finding the need to raise wages in order to retain their current workers or attract new ones. We saw that with Wal-mart’s recent decision that they are going to be raising wages for their workers, so I think we will see stronger wage growth in 2015 as the job market continues to tighten,” he said.

If Fed officials wait too long, however, they risk sparking higher rates of inflation that could hurt economic growth.

“They are concerned about the potential for higher inflation, so I think we will see the Fed gradually, increase interest rates, but it is going to be a process but it is going to be a period of years before interest rates get back to normal levels,” said Faucher.

Fed Chair Janet Yellen is scheduled to speak with journalists Wednesday afternoon and explain the central bank's decisions.

Many economists are watching closely to see if the bank's formal written guidance drops the world "patience."

Some experts say investors are likely to see that change as a signal interest rates could be raised as soon as June. Other economists surveyed by financial news services say rates are likely to be hiked in in September, and a few contend rates won't be pushed up by the Central Bank until next year.