* Fed widely expected to raise rates after policy meeting
* U.S. sells cash management bills ahead of debt ceiling
* Treasury aims to lower cash holding to $23 bln Wednesday (Adds cash management bill sale results, quote)
By Richard Leong
NEW YORK, March 14 (Reuters) - The U.S. Treasury Department on Tuesday sold one-month bills at the highest interest rate in 8-1/2 years as traders braced for a likely quarter percentage-point interest rate increase from the Federal Reserve on Wednesday.
U.S. policymakers are expected to make the move at their two-day meeting as a number of them recently said the world's biggest economy is near full employment and close to their 2 percent inflation goal.
The widely expected rate increase coincides with the possible reinstatement of the federal borrowing limit, which would be about $19.9 trillion, on Thursday.
The Treasury sold $55 billion of one-month bills at an interest rate of 0.770 percent, the highest rate at an auction for this debt maturity since September 2008.
The ratio of bids to the amount offered was 3.40, the lowest since Jan. 24.
Last week, the Treasury auctioned $15 billion of one-month T-bills at an interest rate of 0.570 percent.
In November 2015, U.S. lawmakers agreed to suspend the federal borrowing cap through Wednesday.
Once this expires, the Treasury Department has said it will embark on extraordinary measures, including halting the issuance of certain securities for state and local governments and stopping certain payments in a bid to meet its own debt obligations and avoid a federal default.
These steps would allow the Treasury to sell more debt and give time for lawmakers to work on a deal to remove the borrowing limit before the Treasury is expected to run out of cash in the fall, analysts said.
"If they don't address the debt ceiling issue before their August recess, that would be a good reason to be concerned," said Ward McCarthy, chief financial economist at Jefferies LLC in New York.
The reinstatement of the debt ceiling would require the Treasury to reduce its cash holding, which was $30 billion last Friday, to $23 billion on Wednesday.
The Treasury has ramped up its issuance of short-term debt, including cash management bills (CMB), to ensure they have enough cash on hand without violating its cash balance requirement under the debt ceiling.
On Tuesday, it sold $35 billion of 35-day CMB following Monday's $33 billion auction of 44-day CMB. (Reporting by Richard Leong; Editing by Jonathan Oatis and Dan Grebler)