The bigger question, Kugel said, is how much higher rates will go through the rest of the year.

"(Federal Reserve Chairman Alan) Greenspan talks about a measured increase, and it will probably run for the next 12 months or longer," Kugel said.

Greenspan was recently sworn in for his fifth term. In the past, Greenspan has implemented repeated but rather small changes in interest rates, both up and down, rather than opting for one or two big moves.

Kugel expects that to continue, with the Fed perhaps raising rates by 0.50 percent once or twice.

The Federal Open Market Committee, the Fed's policy-setting arm, meets tomorrow and Wednesday, and is scheduled to announce its decision on rates at the close of the meeting on the second day.

The Fed moves interest rates down to stimulate the economy, as was the case during the recession at the beginning of this decade, or up to curtail spending and fend off inflation, as was the case in the mid-1990s.

"Inflation is perking up gradually," Kugel said, and wages appear to be rising as well after years of stagnation.

That is a recipe for the Fed to start cooking.

Rising interest rates typically are no friend of stocks, and can be toxic for bond prices.

Businesses find it more expensive to borrow for expansion. When rates get high enough, consumers cut back on borrowing, and that crimps the demand for goods and services, further hurting companies.

But some who observe investor behavior said higher interest rates are factored into stock prices, meaning no turmoil is likely in the exchanges this week.

"This has been priced into the market for more than a month," said William Hummer, chief economist with Wayne Hummer Investments. "I think the market has discounted" a rate increase.

In the studiously dry idiom of government economists, the Fed issues a brief statement after every meeting. The statement is closely parsed by analysts to see how the Fed views the future.

Hummer said he expects a bit of reassurance from the Fed. The statement "will play down any imminent inflation threat," he said.

Bond prices move inversely to interest rates, meaning their current value tends to go down when rates go up. In other words, bond investors get beat up when interest rates increase.

But Hummer says bond prices already reflect higher interest rates, and much of the damage to value has been done.

"I think the bond market will retain its equilibrium," he said.

He said bond prices might even rise a bit in a relief rally, if the Fed raises interest rates just 0.25 percent.

Economic reports due out this week include Chicago-area and national manufacturing on Wednesday and Thursday, respectively, but the one likely to draw the most interest is the jobs report for June, scheduled to be released Friday.