Traders and analysts expect the Federal Reserve ) to raise key short-term US interest rates to prevent the US economy from overheating, after its Open Market Committee meets today and tomorrow.

Most traders believe the Fed will increase the benchmark federal funds rate by one quarter of a percentage point to 5 per cent, marking the first increase for more than two years.

The Fed Chairman, Mr Alan Greenspan, left little doubt about the committee's intention when he spoke to Congress on June 17th.

"When we can be pre-emptive, we should be, because modest pre-emptive actions can obviate the need of more drastic actions at a later date," he told the Joint Economic Committee of Congress.

"Should labour markets continue to tighten, significant increases in wages, in excess of productivity growth, will inevitably emerge," Mr Greenspan said. Increased labour costs could lead to a resurgence of inflation.

Mr Greenspan's remarks virtually guaranteed a rate increase in the short term, said Marilyn Schaja, an economist for Donaldson Lufkin Jenrette.

Currently, the US unemployment rate is at 4.2 per cent, the lowest level for a generation.

The latest picture of the US economy show 4.3 per cent growth

over the last year, lower than the 6 per cent growth returned in the fourth quarter of 1998, but above last year's average of 3.9 per cent.