Fed Raises Rates by Quarter Point to 4.50 Percent

Federal Reserve officials, meeting one last time under Alan Greenspan's guiding hand, on Tuesday to raised U.S. interest rates for a 14th straight time to 4.50 percent, cautioning that borrowing costs may still need to move up.

The U.S. central bank's rate-setting Federal Open Market Committee voted unanimously to lift the benchmark federal funds rate by a quarter-percentage point to 4.50 percent, the highest level since April 2001.

The meeting marked the end of Greenspan's 18-1/2 years in office.

The increase will raise borrowing costs for millions of American consumers and businesses as banks were expected to quickly boost their prime lending rates by a similar quarter-point. The prime rate stood at 7.25 percent before Tuesday's Fed meeting.

Many private economists believe that the Fed is likely to raise rates at least one more time, at its next meeting on March 28. But the Fed modified its statement on Tuesday to give Greenspan's successor, Ben Bernanke, more leeway.

Bernanke, a former Fed board member who since last summer has been President Bush's chief economic adviser, was scheduled to take over on Wednesday as the Fed's 14th chairman since the central bank was created in 1913.

The central bank modified Tuesday's statement to remove the word "measured," which it had been using to signal further gradual quarter-point moves.

Instead, the central bank said that "some further policy firming may be needed" to keep inflation under control. That was a slight change from the December meeting when it had said that "measured policy firming is likely to be needed."

"Although recent economic data have been uneven, the expansion in economic activity appears solid," the Fed said in its statement.

"Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained," the central bank added, while repeating a warning that higher energy prices and tight labor markets "have the potential to add to inflation pressures."

When the Fed began to push up the overnight federal funds rate 19 months ago, it stood at a 1958 low of 1 percent. The benchmark rate is now close to a level many economists say neither spurs nor weighs on economic activity.

In futures markets, where bets are placed on the direction of interest rates, investors see about an 80 percent chance of another quarter-point tightening at the Fed's next meeting on March 28, the first gathering at which Bernanke will take the lead.

The U.S. economy expanded at a meager 1.1 percent rate in the fourth quarter of last year, but inflation aside from volatile food and energy prices was running a bit faster than Fed policy-makers want.

However, so-called core prices edged up just 0.1 percent in December and have gained only 1.9 percent over the past 12 months, just within the Fed's perceived comfort zone.

While most economists expect the economy to rebound sharply this quarter from its surprisingly sluggish pace at the end of 2005, some expect a softening housing market to eventually take the wind out of the expansion's sales.

Reuters and the Associated Press contributed to this report.