The Federal Reserve is expected to raise interest rates on Tuesday and signal further increases, after recent speeches by Fed policymakers highlighting concerns about inflation risks.

While there has been no indication that the Federal Open Market Committee will change its judgment that monetary policy remains "accommodative" and that it will continue to raise rates at a "measured" pace, there is a widespread feeling that part of the statement will need to change soon.

A decision on Tuesday to raise rates to 4 per cent which would be the 12th consecutive quarter-point rate increase is unlikely to provoke controversy. Mark Olson, the Fed governor who voted against September's increase, is likely to fall back into line, given good recent data.

One concern is that the federal funds rate is no longer obviously well below the so-called "neutral" level, at which monetary policy neither restricts nor stimulates activity. But there does not yet appear to be a consensus on what should happen next, and the current language in the Fed's statement is seen as acceptable for now, with the FOMC likely to raise rates again in December.

Estimates of the neutral rate tend to put it in a range centred on 4.25 per cent. Fed policymakers rarely discuss such numbers but Janet Yellen, president of the San Francisco Fed, recently estimated the neutral rate from 3.5 to 5.5 per cent. "The current federal funds rate is toward the lower end of this band," she said in a speech.

The economy continued to grow at a healthy 3.8 per cent rate in the third quarter, according to the Commerce Department's advance estimate, providing further evidence to support the Fed's view that there is good momentum in spite of high energy prices. The economy's long-term potential rate is often put at 3.25 to 3.5 per cent. There has been no sign that the economy was knocked off course by the hurricanes, though high natural gas prices remain a concern.

The Fed's focus on inflation reflects in part the fact that the rise in energy prices is expected to feed into higher core inflation.

The Fed's favoured measure of core inflation is already at the top of the 1-2 per cent "comfort" range popularised by Ben Bernanke, the former Fed governor nominated last week to replace Alan Greenspan at the helm.

The FOMC will react to the incoming inflation and growth data. Key questions include inflation expectations and the extent of cost pressures from the labour market. High energy prices are a risk for both inflation and growth. With housing prices expected to level off at some point, a major uncertainty is whether business investment will pick up to take the strain if consumer spending slows.