Fed Raises Interest Rates by 1/4 Point

As expected, the Federal Reserve Tuesday raised its bellwether federal funds rate (search) target by a quarter-percentage point to 2.75 percent from 2.50 percent, its seventh increase in a row.

The unanimous decision by Fed Chairman Alan Greenspan (search) and the Federal Open Market Committee (search) is part of a credit-tightening campaign to bring rates back up to more normal levels.

The Fed kept language that it has used with every rate increase, saying that future rate hikes would occur "at a pace that is likely to be measured," language seen as indicating continued quarter-point moves at the central bank's regular meetings.

Speculation that the Fed might drop its pledge to move rates at a "measured" pace was sparked last month when Greenspan, in congressional testimony, did not use the word "measured" to describe the Fed's future intentions.

However, the Fed did indicate somewhat more concern about inflation, saying, "Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident."

But the Fed said that it did not believe that the rise in energy prices had "notably fed through to core consumer prices."

Analysts said this comment supported a view voiced by Greenspan and other Fed officials that while energy prices have been increasing, those higher costs have not triggered higher overall inflation pressures.

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 2004 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, December, February, and then once more on Tuesday.

The funds rate moves in lockstep with commercial banks' prime lending rate, which is used for many short-term consumer and business loans. The prime rate, now at 5.50 percent, would climb to 5.75 percent if the Fed pushes the funds rate up by one-quarter point Tuesday.

Analysts said the Fed had to be pleased by recent signs of economic strength including the report that 262,000 new jobs were created in February, the biggest gain in four months.

Many economists believe the economy has been growing at a rate above 4 percent in the January-March quarter.

So far, the so-called core rate of inflation, excluding volatile energy and food prices, has stayed well-behaved at the retail level. While core inflation rate at the wholesale level shot up by 0.8 percent in January, the fastest pace in more than six years, the government reported Tuesday that these price pressures eased significantly in February, with core wholesale prices rising by only 0.1 percent.

Wall Street is looking for oil prices to retreat in coming months, helping inflation pressures to subside.

Some analysts said the Fed could stay with its measured pace of quarter-point moves for the rest of the year and, if it does, they don't see long-term rates — which are set by financial markets — surging either.

Rates on 30-year mortgages have been rising for the past five weeks and stand at 5.95 percent, according to a weekly survey by Freddie Mac but many analysts believe the 30-year rate will rise to only around 6.5 percent by the end of the year, just a half-point higher than it is now.

Reuters and the Associated Press contributed to this report.