WASHINGTON - The American Bankers Association on Wednesday forecast strong U.S. job growth and moderate inflation, and said the Federal Reserve would likely raise interest rates a quarter of a percentage point at its meeting next week.

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"Moderate inflation should allow the Fed to pursue a strategy of gradually raising rates for the balance of the year," Lynn Reaser, chairwoman of the ABA Economic Advisory Committee, said in a statement.

U.S. real gross domestic product should grow at an annual rate of close to 4.5 percent for the rest of the year and by nearly 4 percent in 2005, the panel forecast.

The committee said it believed the economy could easily withstand interest-rate increases and estimated the federal funds rate would rise to about 2 percent by the end of the year, double the current 1958 low of 1 percent.

The key overnight lending rate is expected to hit 4 percent by the end of 2005 or 2006, Reaser said, adding that fears of deflation were yesterday's concern.

"The story has shifted 180 degrees from where we were a year ago," Reaser said.

The ABA also forecast monthly job gains averaging 250,000 or more for the remainder of 2004.

"The economic expansion now appears to have staying power and we expect job growth to remain strong," Reaser said. "This should push the unemployment rate lower by year end."

She said fears of a jobless recovery had not been realized: "It does appear that jobs are being again created in the U.S. economy."

America has churned out nearly a million jobs in the last three months, with nonfarm payrolls climbing 248,000 in May and the unemployment rate steady at 5.6 percent.

The banking group's economic advisory panel said geopolitical risks were a "wild card" in its economic forecasts, particularly in how they will affect the price of oil.

"China's effort to create a soft (economic) landing should also be closely monitored," the committee said.

The committee said U.S. mortgage rates were past their low point for the cycle and will rise moderately.

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