WASHINGTON - The Federal Reserve Board will raise interest rates this year, causing the economy to grow more slowly, according to the chief economists of some of the nation's largest banking companies, whose forecast was released Wednesday.

The American Bankers Association's economic advisory committee, which makes an economic forecast twice a year, also said growth in bank lending should slow slightly this year. It predicted an increase of 6.7% in consumer installment credit, down from last year's 7%. Commercial and industrial lending was predicted to grow 5.8%, down from 6%.

Inflation is expected to remain modest, at a 2.4% rate, the same as in 1999, the economists said.

But the committee qualified its predictions, warning that it would be difficult to preserve the situation in which historically low unemployment and a related increase in spending have failed to ignite inflation.

"In the long run, high demand and low prices do not coexist," said Carl Tannenbaum, chairman of the committee and senior vice president of LaSalle Banks/ABN Amro in Chicago.

"This could be a very challenging year for the Federal Reserve," he said. "Their traditional navigational mechanisms, such as money supply growth and GDP growth, have not been accurate guides to the recent path of inflation."

- Rob Garver

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.