Fed Raises Interest Rates by 1/4 Point

In a widely expected move, the Federal Reserve (search) Wednesday raised its target for the federal funds rate by a quarter percentage point to 2.50 percent from 2.25 percent, the sixth increase in a row.

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.

Click here to read the full text of the FOMC's statement

In explaining its action, the Fed repeated a previous promise that it believed it would be able to raise rates at a "pace that is likely to be measured."

Analysts believe the Fed will keep raising rates in small quarter-point steps as long as there are no signs that inflation is becoming a problem.

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, September, November and December, and then once more on Wednesday.

Consumer prices rose by 3.3 percent last year, compared to a 1.9 percent rise in 2003. It was the biggest annual increase since 2000, but it was driven by a surge in energy prices. Inflation pressures are expected to moderate this year, helped by an expected continued decline in global oil prices.

The Fed's goal is to move the funds rate from an accommodative stance, where it is still stimulating extra economic growth, to a neutral stance where the funds rate is neither stimulating growth nor holding the economy back.

"The Fed is taking its foot off the accelerator without hitting the brakes," said Richard DeKaser, chairman of an American Bankers Association (search) panel of economists that meets twice a year with Fed policy-makers to give them their views of where the economy is headed.

There is debate in economic circles about where the neutral level is, but many economists believe it is somewhere between 3.5 percent and 4.5 percent for the federal funds rate.

If the Fed keeps increasing rates by a quarter-point at each of the eight scheduled meetings this year, the funds rate would be at 4.25 percent at the end of this year, a level where many analysts believe Greenspan will feel good about stepping down in January 2006 when his term as a Fed board member ends.

Commercial banks were expected to increase their prime lending rate to 5.50 percent, from 5.25 percent. The prime lending rate, the benchmark for many short-term consumer and business loans, moves in lockstep with the funds rate.

Reuters and The Associated Press contributed to this report.