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As the Federal Open Market Committee debates whether to hike interest rates this year, the next question for the central bank is whether it wants to do so without raising inflation.
The Fed has raised rates by a full percentage point or more in the past five years, and has already raised rates twice this year.
That means the Fed is likely to consider the potential impact of raising rates without inflation in a meeting that starts next week.
“If the Fed starts to increase interest rates without a strong economic recovery, that will have a direct impact on inflation,” said Jim O’Sullivan, chief U.S. economist at Deutsche Bank.
The risk is that if inflation is not moving faster than inflation in the short run, the Fed could raise rates in the middle of the next recession.
The economy has bounced back from a steep decline in consumer spending last year, but it still has a long way to go.
It is now projected to be 3.7 percent lower than it was before the financial crisis, according to the CBO.
It also needs to grow at 2.3 percent this year and 2.9 percent next year.
“This will be the first time that the Fed raises rates without some kind of economic recovery,” said Ben Bernanke, chairman of the Federal Bank of New York.
The central bank raised interest rates last year by 0.25 percentage points and is expected to raise rates again this year by a half point, at least if the economy keeps moving in the right direction.
But Bernanke has said the Fed has not decided whether to raise it now because it wants a stronger economy before the economy grows to the size it needs to sustain an increase.
“We don’t know if we can go in with a strong economy before we hit a recession,” Bernanke said in September.
“So we have to do some thinking.”
The Fed’s policy makers are still weighing how much inflation to target, and the timing of a rate increase.
If they decide to do it now, the central banks most likely will want to move quickly.
Bernanke and other Fed officials said Wednesday that if they are forced to raise the rate without a recovery, it could take two years or more before the Fed would be able to bring rates back to normal.
In the past, Bernanke suggested the Fed might wait until it had a better understanding of the economy’s health.
Berners rate would be based on a forecast of what would happen in the economy over the next few years.
That could help the central bankers decision whether to cut rates or keep them on hold for another year.
The CBO estimates the unemployment rate will remain below 6 percent in 2019.
Bern’s view that the economy will grow faster than he expected is one that the Federal Economic Council is considering, but not likely to announce before the October meeting, according a person familiar with the matter.
The policy committee is expected in December to vote on the Fed’s next move.
It could decide to increase the Fed Funds rate, which it is allowed to do at its June meeting without raising rates.
Bern has said inflation will not fall below 2 percent.