NEW YORK – In a widely expected move, the Federal Reserve (search) Tuesday raised its target for the federal funds rate by 25 basis points to 1.75 percent, its third rate increase in a row.
The unanimous decision by Fed Chairman Alan Greenspan (search) and the rate-setting Federal Open Market Committee (search) still keeps the federal funds rate (search) for overnight loans between banks at historically low levels.
"After moderating earlier this year partly in response to the substantial rise in energy prices, output growth appears to have regained some traction, and labor market conditions have improved modestly," the Fed said in a statement outlining its rate decision, which also increased the largely symbolic discount rate to 2.75 percent.
Fed policy-makers stuck to their view that future rate increase would be gradual. The central bank said rates could be raised raised at "a pace that is likely to be measured" given that inflation is expected to remain relatively low.
Despite the rise in energy prices, inflation has eased in recent months, the Fed added.
The fed funds rate, the interest that banks charge each other on overnight loans, is the Fed's primary tool for influencing the economy. The Fed cut rates 13 times since early 2001 in an effort to foster a vigorous expansion.
As a result of the Fed's decision to push up the funds rate, commercial banks increased their prime lending rate for many short-term consumer and business loans by a corresponding amount. The prime rate, which has been at 4.50 percent, is expected to rise to 4.75 percent.
The Fed's rate increase comes with Election Day just six weeks away. President Bush and his Democratic rival, John Kerry, hold widely divergent views of how the economy and the nation's job market are faring.
Incumbent politicians normally are unhappy if the Fed raises interest rates close to an election. Yet, some economists said that by raising rates, the Fed could be viewed as appearing comfortable about the pace of the economy's expansion, which could be seen as good for the Bush campaign.
Greenspan, appearing before Congress this month, said the economy has "regained some traction" after hitting a "soft patch" in the late spring. He blamed much of that softness on soaring energy prices.
Before the Fed ordered its first rate increase of the year in June, the funds rate had been kept for a year at 1 percent, a 46-year low, to help support the economy.
A series of 13 rate reductions that began in January 2001 and ended in June 2003 left the funds rate at the 1 percent level. During that period, the Fed battled to help an economy staggered by a series of blows from a plunging stock market and the 2001 recession to terrorist attacks and two wars.
Analysts believe the funds rate will rise to 2 percent by the end of this year. Economists, however, have mixed opinions on how additional rate increases will unfold after Tuesday's meeting. Some believe the Fed will boost rates again at its Nov. 10 meeting, then stand pat Dec. 14, its last meeting of the year. Others believe the Fed might take a breather at the November meeting but raise rates in December.
Reuters and the Associated Press contributed to this report.