NEW YORK – In a widely expected move, the Federal Reserve (search) Wednesday raised its target for the federal funds rate by a quarter percentage point to 2 percent from 1.75 percent.
The unanimous decision by Fed Chairman Alan Greenspan (search) and the rate-setting Federal Open Market Committee (search) is part of a credit-tightening campaign to bring rates back up to more normal levels now that the economy's recovery from the 2001 recession is more deeply rooted.
The federal funds rate (search), the interest that banks charge each other on overnight loans, is the Fed's primary tool for influencing the economy.
Fed policy-makers stuck to their view that future rate increases would be gradual. They said rates could go up at a pace likely to be "measured," retaining language contained in previous statements.
"Output appears to be growing at a moderate pace despite the rise in energy prices, and labor market conditions have improved," the Fed said .
"The committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity," it added in language that mirrored its prior rate statement and gave no hint of a halt anytime soon.
The Fed also said that inflation and longer-term inflation expectations "remain well contained," another reason why the Fed can stick with its gradual approach to raising rates.
The vote was unanimous.
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, a 46-year low. 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.
The Fed's current rate-raising campaign began in June with a quarter-point boost, marking the first rate increase in four years. The Fed bumped up rates again by a quarter-point in August and September and then once more on Wednesday.
The Fed also increased the largely symbolic discount rate to 3 percent. As a result of the Fed's decision to push up the fed funds rate, commercial banks are increasing their prime lending rate for many short-term consumer and business loans by a corresponding amount. The prime rate, which has been at 4.75 percent, is expected to rise to 5 percent.
The Fed's rate increase comes as many economists believe the economy has emerged from a late spring and early summer soft patch.
The economy added a sizable 337,000 jobs in October, the most since March, the government said last week. While the figures were helped by job gains related to hurricane cleanup efforts, they nonetheless raised hopes that the recovery in the labor market, which has been uneven, is gaining some real traction.
The pickup in October's payrolls was welcome news to President Bush, who sparred frequently with Democratic rival, John Kerry, over the health of the labor market and job losses that have occurred since Bush took office in January 2001.
Economists believe the odds are rising that the Fed might boost the funds rate again at its last meeting of the year on Dec. 14. Before the good news on October payrolls, many economists believed the Fed would probably stand pat at the December meeting.
Private economists are keeping close tabs on the direction of the jobs market and on energy prices, too.
Oil prices have retreated from a record high of just over $55 a barrel seen late last month and were trading at over $47 a barrel on Wednesday.
The economy grew at a 3.7 percent annual rate in the third quarter of this year. But it could slow a tad in the current quarter, weighed down somewhat by the lingering effect of high energy prices, economists said. In October, though, consumer spending — the lifeblood of the economy — was brisk.
Despite high oil prices, inflation isn't an immediate threat to the economy, analysts said. The Fed, however, wants to make sure it doesn't become a problem in the future. That's why the Fed has been pushing up the funds rate, analysts said.
Reuters and the Associated Press contributed to this report.